Can Rio Tinto plc’s Share Price Return To 6,969p?

Will Rio Tinto plc (LON: RIO) be able to return to its previous highs?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.

Today I’m looking at Rio Tinto (LSE: RIO) (NYSE: RIO.US) to ascertain if its share price can return to 6,969p.

Initial catalyst

To establish whether or not Rio’s share price is able to return to 6,969p, we need to figure out what caused it to reach that level in the first place. In the case of Rio, it would appear that like many of the company’s peers, the rally was spurred by the market euphoria of 2008. 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

In addition, this record share price of 6,969p came after three years of impressive performance on Rio’s part, which saw the company drive up earnings by 125% from 2004 to 2007.

Indeed, this rapid growth in such a short period of time meant that investors were prepared to pay a premium for Rio’s shares, as it seemed that the good times would never end. In particular, at a price of 6,969p per share, Rio was trading at a historic P/E of 24.6.

In comparison, BHP, which at the time was Rio’s smaller peer, (BHP is now nearly twice the size of Rio) was trading at a historic P/E of 18.5.

But can Rio return to its former glory?

As we all know, the 2008 crisis hit the prices of all assets hard and as commodity prices slumped, so did Rio’s earnings, up to 50% in the following two years.

Unfortunately, volatile commodity prices continue haunt Rio and the company’s revenue figure for 2012 was 10% below that reported for 2008, despite higher output. Additionally, the company’s operating margin has slumped by nearly a third from the figure reported at the end of 2007.

What’s more, the outlook for the commodity markets continues to remain uncertain. It is also unlikely that Rio’s growth will return to pre-2008 rates any time soon.

Still, Rio is now in a better financial position than it was back in 2008. For example, the company’s net debt is now around $19 billion, half the figure of $45 billion reported for 2008. Shareholder equity is also shot up from 2007’s level of $26 billion, to $46 billion reported at the end of 2012. That’s book-value-per-share of around 2,500p, which gives the company a more stable footing to make a run at 6,969p.

Foolish summary

All in all, Rio’s the initial catalyst that pushed Rio’s share price up to 6,969p was the company’s rapid earnings growth. Unfortunately, due to uncertainty within the commodity markets, it is unlikely that Rio will return to this rate of growth any time soon.  

So overall, I feel that Rio Tinto cannot return to 6,969p. 

However, don’t buy any shares just yet

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Secure your FREE copy

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Rupert does not own any share mentioned within this article. 

More on Investing Articles

Investing Articles

2 stocks that could help investors earn £2,516 of passive income per year from a £20k ISA

Our writer selects two high-yield UK dividend shares for investors to consider that could turbocharge a passive income portfolio.

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Why I think FTSE 100 dividend shares could build a better second income than the S&P 500

US tech stocks are hot, but when aiming for a sustainable second income later in life, our writer prefers dividend-paying…

Read more »

Investing Articles

2 blue-chip FTSE 100 shares Hargreaves Lansdown investors have been buying in the market sell-off

When global markets were in meltdown mode, Hargreaves Lansdown investors recently piled into these two well-known FTSE 100 names.

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Investors considering £10,000 of Sainsbury’s shares could one day make £2,590 a year in dividend income!

Sainsbury’s shares deliver a yield significantly over the FTSE 100’s 3.8% average and they also look very undervalued against their…

Read more »

Trader on video call from his home office
Investing Articles

After a 12% drop in a month, is it finally worth me buying this rare FTSE technology stock?

A scarcity of technology shares in the FTSE 100 pushed the prices of many beyond their fair value, I think.…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

How can I protect my 2025 Stocks and Shares ISA against tariff war pain?

Just when we were looking forward to a new Stocks and Shares ISA allowance for 2025-26, the world is thrust…

Read more »

Mature black couple enjoying shopping together in UK high street
Investing Articles

As WH Smith shares rise despite its H1 loss, I still think they’re good value

Shares in retail companies have been having a tough time recently, but does the latest FTSE 250 stock to report…

Read more »

Investing Articles

The top 3 mistakes to avoid if the stock market crashes

When the stock market dips, it can make even the hardiest of investors quiver at the knees. But no matter…

Read more »