Its been a mixed year for investors in the major mining stocks. Indeed, while BHP Billiton (LSE: BLT) has made reasonable gains of 3% since the turn of the year, Rio Tinto (LSE: RIO) has seen its share price fall by 4%. Thats despite an encouraging set of recent results. So, are the two companies worth buying? And, more importantly, could they turn your portfolio into a seven-figure one?
When it comes to future potential, both Rio Tinto and BHP Billiton have it by the bucket-load. Certainly, the emerging market growth story is now not quite as popular as it once was, mainly as a result of China transitioning from a capital expenditure-led economy to one driven by consumer spending. The result of this is likely to be a relatively lower demand from China for commodities in future years. However, there are countless other countries that are yet to engage in vast infrastructure spending, while Chinese demand should remain buoyant for many years to come. So, considerable growth potential continues to be on the long-term horizon for both stocks.
However, neither Rio Tinto nor BHP Billiton is priced for growth. They both trade on price to earnings (P/E) ratios, for instance, that are low and offer substantial upside potential. Indeed, Rio Tintos P/E ratio of 10.3 is 34% lower than that of the FTSE 100, while BHP Billiton has a P/E of 12.4. Clearly, Rio Tinto is cheaper than BHP Billiton and has greater potential for a considerable upward rerating moving forward.
Due to their low prices, both companies offer great yields at present. For example, Rio Tinto yields 3.9%, while BHP Billitons yield is slightly higher at 4%. What makes BHP Billitons dividends even more attractive is the company has a relatively resilient earnings profile. Unlike Rio Tinto, which relies upon iron ore for nearly all of its profit, BHP Billiton is hugely diversified and so if the price of one commodity (e.g. iron ore) falls significantly, its bottom line will be far less affected than that of Rio Tinto. This makes BHP Billiton the steadier and more reliable company of the two.
Clearly, neither Rio Tinto nor BHP Billiton is likely to turn a small investment into 1 million. However, both companies could deliver strong capital gains, as well as great incomes, moving forward. For investors who want to take on more risk, with a higher potential reward, Rio Tinto could prove to be a winning play due to its very low valuation, but its reliance on one commodity could cause volatility in future. Meanwhile, BHP Billitons share price includes a premium for diversification, which means that the answer could be to own both and allow your portfolio to benefit from their combined long term potential.
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Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.