Is Now The Right Time To Buy Rio Tinto plc?

Rio Tinto plc (LON:RIO) has a volatile share price, but the underlying business is stable and is an income buy at the right price.

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Rio TintoDespite its size, mining giant Rio Tinto (LSE: RIO) (NYSE: RIO.US) tends to deliver a volatile ride for investors — for example, after peaking at 3,680p in February, Rio’s share price dropped 15% to 3,140p, in just three weeks.

Although volatility like this can be offputting for investors, I don’t think it needs to be: Rio is large, profitable and pays a reliable dividend. Short-term share price movements aren’t important, unless you want to buy or sell.

Rio’s share price is now 8% higher than one year ago, but 3% lower than at the start of 2014. Is now a good time to buy?

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Valuation

Let’s start with the basics: how is Rio valued against its past performance, and the market’s expectations of future performance?

P/E ratio Current value
P/E using 5-year average adjusted earnings per share 9.4
2-year average forecast P/E 10.4

Source: Company reports, consensus forecasts

Analysts’ earnings forecasts for the next couple of years are broadly in-line with Rio’s five-year average earnings, leaving Rio looking cheap.

Although earnings are expected to remain in-line with Rio’s five-year average earnings, the dividend is expected to rise: Rio currently offers a prospective yield of 3.8%, and consensus forecasts suggest that the dividend will rise by 8% this year, and in 2015.

Based on these figures, Rio remains on my buy list.

What about the fundamentals?

In the long term, a company’s market value is linked to its sales and profit growth. For miners such as Rio, these figures can be quite volatile from year-to-year, as sales and profits are linked directly to commodity prices.

However, using a five-year timeframe helps smooth these variations out — how strong is Rio’s growth record?

5-year compound average growth rate Rio Tinto
Sales 4.9%
Adjusted earnings per  share 9.1%
Dividend (2010 – 2013) 12.2%

Source: Company reports

Rio cancelled part of its dividend in 2009, so I’ve calculated dividend growth since 2010, to give a more balanced view of growth. Despite this, Rio’s four-year average dividend growth rate of 12.2% is impressive, as is the 9.1% annual growth in adjusted earnings per share.

Sales growth of 4.9% per year is respectable, given the firm’s size, and overall, Rio’s growth record looks acceptable to me, given the firm’s valuation. I’m particularly encouraged by the miner’s above-inflation dividend growth, which makes it attractive for income investors.

A long-term recipe for success?

I think Rio looks good value at its current price, and rate it as a strong buy for income.

The company’s giant low-cost ore mines mean that if the price of iron ore falls, higher-cost competitors will be squeezed out of the market, which should help to support Rio’s profits.

Should you invest £1,000 in Bank of Georgia right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Bank of Georgia made the list?

See the 6 stocks

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.

Roland Head owns shares in Rio Tinto. The Motley Fool has no position in any of the shares mentioned.

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