Up due to its second quarter earnings beating Wall Street
estimates, Rio Tinto (
RIO
,
quote
) is still an appealing buy with an above average yield as a
dividend paying stock and a double digit profit margin.
[caption id="attachment_70112" align="alignright" width="300"
caption="An iron ore reclaimer in action for Rio Tinto"]
[/caption]
Like fellow commonwealth mining company BHP Billiton (
BHP
,
quote
) of Australia, Rio Tinto, headquartered in London, is very much
beholden to China and its demand for iron ore
. As
economic growth in China has been slumping
, so has the need for iron ore for its blast furnaces. As a result
Rio Tinto is down more than 17% for the last six months of market
action. Over the same period, BHP Billiton has fallen more than
13%.
But Rio Tinto, like BHP Billiton, has began to recover.
Investors are realizing that China is still growing, just not at a
double digit clip, and with inflation coming in at a new low of
1.7% the central bank has plenty of room for stimulus. On a
quarterly basis, Rio's sales are up 2.79%. For the next year,
earnings-per-share growth is expected to rise by 17.11%. That is a
very bullish trend from the present earnings-per-share growth. The
forward price-to-earnings ratio for Rio Tinto is projected to be
just 6.37.
As a dividend paying stock, the healthy framework of Rio Tinto
enhances the appeal of the sales growth and earnings-per-share
growth. While the average yield for a dividend paying stock on the
Standard & Poor's 500 Index is around 2%, Rio Tinto's is 2.89%.
The dividend payout ratio -- the amount of earnings utilized for
paying the dividend, is low enough that there is ample cash flow to
increase the dividend in the future or initiate stock repurchase
programs to reward shareholders.
A high dividend and low payout ratio are signs of not only a
solid company, but very savvy corporate management in rewarding
shareholders while not risking the capital structure of the
business.
Now trading around $50 a share, the mean analyst target price
for Rio Tinto over the next year is $81.37. The mean analyst
rating is a bullish 1.70 (1 is a Strong Buy and 5 is a Strong
Sell). While Rio Tinto is up 7.78% for the last week of trading and
8.27% for the last month, with a short float of only 0.68%, few are
betting the share price will fall.
