RIO share price in focus
Founded in 1873, Rio Tinto is today the world’s second largest metal and mining company, behind only BHP Group. Rio Tinto is engaged in minerals and metals exploration, development, production and processing.
Rio can be divided into four core business units: Aluminium, Copper & Diamonds, Energy & Minerals and Iron Ore.
Of the four units, iron ore (the primary component in steel manufacturing) is by far the largest export. It’s no surprise then that the performance of the company can be strongly affected by the price of iron ore and other key commodities, making earnings somewhat volatile.
The case for Resources shares
The S&P/ASX200 Materials Index (ASX: XMJ) has averaged 5.49% per year in capital growth over the last 5 years. That compares to the average of all ASX sectors of 3.52% over the same period. Let’s take a look at why you might want a materials company like RIO in your portfolio.
Big dividends
While the capital growth goes through good periods, it’s really the dividends that most investors are interested in when assessing resource shares. After all, it’s what they’ve been known for for many years. Over the last 5 years the RIO dividend yield has averaged 6.42% per year.
Aussie materials companies like RIO have developed a good reputation of being reliable dividend payers. However, these are still commodity-driven businesses so the dividends (like the share price) can fluctuate quite a bit.
Growth potential
Mining is one of the backbones of our modern economy and the demand for things like iron ore, copper, and lithium is not going away any time soon.
In fact, the demand for a lot of precious metals is rapidly growing as the economy transitions to renewable energy. A lot of these materials are needed for things like electric car batteries and solar panels. Companies like BHP and Rio Tinto are investing a lot of money to put themselves at the forefront of this oncoming wave of demand.
RIO share price valuation
One way to have a ‘fast read’ of where the RIO share price is would be to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a shareholder, but it can fluctuate year-to-year or between payments. Currently, Rio Tinto Ltd shares have a dividend yield of around 5.18%, compared to its 5-year average of 6.42%. Put simply, RIO shares are trading below their historical average dividend yield.
Be careful how you interpret this information though – it could mean that dividends have fallen, or that the share price is increasing. In the case of RIO, last year’s dividend was less than the 3-year average, so the dividend has been falling.
The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the RIO share price.
