Today I am looking at whether now is the time to do some bargain hunting by stocking up on Rio Tinto (LSE: RIO) (NYSE: RIO.US).
A well-priced growth AND income pick
On the face of it, diversified mining giant Rio Tintos share price appears to be too good to be true. During the course of a tumultuous 2014 the business has shed more than 16%, with fears of growing oversupply across key markets prompting concerns of further commodity price weakness next year and beyond.
Against this backcloth Rio Tinto is expected to punch heavy 12% earnings declines during each of the next two years. Given these concerns the company fully deserves to be trading on ultra-low earnings multiples, and it could be argued that the massive risks facing Rio Tinto are right now baked into the price indeed, P/E readouts of 8.6 times and 9.4 times for 2014 and 2015 correspondingly fall well within the bargain territory of 10 times or below.
On top of this, Rio Tintos heavy price descent also presents dividend yields comfortably above the current 3.3% FTSE 100 average. The fruits of significant capex reductions, ongoing asset shedding and extensive cost-cutting are expected to deliver chunky dividend advances this year and next, resulting in lip-smacking yields of 5% for this year and 5.4% for 2015.
but are forecasts set for renewed pressure?
However, I believe that Rio Tinto like the rest of its mining sector peers remains a high-risk stock selection that could disappoint bargain chasers should fresh earnings downgrades materialise.
Firstly, questions over the health of the Chinese economy continue to mount, with industrial output still sagging and forecasts for natural resources demand subsequently darkening. Just this month, the Peoples Bank of China warned that it expects GDP growth to slow to 7.1% next year on the back of a cooling property sector, down from an expected 7.4% in 2014 and marking a huge departure from an expansion of 7.7% recorded last year.
News of sagging construction activity comes as a particular concern for Rio Tinto, which generates around three quarters of all profits from the critical steelmaking ingredient iron ore. Meanwhile the implications of fiscal stress in the eurozone also threatens to derail finished goods demand in this region, further smacking commodities demand.
Despite these worries, however, Rio Tinto and its peers like BHP Billiton and Vale continue to ramp up production at their low-cost assets across the globe, exacerbating the market imbalance and pushing prices still lower.
With no clear indication over when commodity prices are likely to hit bottom iron ore prices slid to another five-year trough just this week Rio Tinto could see both earnings and dividends disappoint next year and potentially beyond.
Ready to retire on a fortune?
So if you consider Rio Tinto too risky a share selection, I strongly urge you to check out THIS BRAND NEW AND EXCLUSIVE REPORT which reveals the measures you need to take to become a stock market millionaire.
Our recently-revised “How You Could Retire Seriously Rich” wealth report tells you how you can propel returns from your investment portfolio through the roof with just SEVEN simple steps devised by the Fool’s crack team of analysts. Click here to download the report — it’s completely free and comes with no further obligation.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.
Royston Wild has no position in any shares mentioned. 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.
