Is Rio Tinto plc A Promising Capital-Growth Investment?

Some firms’ growth is more sustainable than others. What about Rio Tinto plc (LON: RIO)?

| 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.

Rio TintoThose invested in Rio Tinto (LSE: RIO) (NYSE: RIO.US) did well on capital gains over the last 10 years. The resource firm’s shares rose about 140% over the period.

Those invested in Rio Tinto did poorly over the last six years. The shares dropped around 50%

Those invested in Rio Tinto did well over the last five-and-a-half years. The shares rose about 200%.

Those investing in Rio Tinto for the next 10 years may do spectacularly well as the shares multi-bag, or they may lose money as the shares halve.

Investing or gambling?

The firm’s inherent cyclicality leads to some particularly violent share-price fluctuations. Output commodity prices oscillate with the whims of demand, and a commodity business such as Rio Tinto has very little pricing power. The firm must sell its production into a market that dictates what it will pay.

When the market says the price will be low, Rio Tinto’s profits and cash flow go down, taking the share price with them. The outcome for investors can be catastrophic, or wonderful, depending on which side of the movement the bet is placed and at which point in the share-price cycle.

One thing seems certain, though: Rio Tinto and other big resource companies are not the best candidates for a long-term investment on the stock market. The outcome could go either way. Those making money on resource stocks are doing it by taking a short-term approach that attempts to time the cycle.

Forget buy-and-forget when it comes to Rio Tinto. It doesn’t matter how hard the firm is working right now to ramp-up production or to cut costs, or how big the dividend payment might be, the risk of share-price and dividend reversal is always present

Muted demand

Iron ore prices have been down lately thanks to muted demand from big buyers such as China. Rio Tinto gets nearly half its turnover from producing iron ore, so a price recovery could catalyze share-price uplift from today’s 3042p.

On the other hand, the iron-ore price could half. Why not? We might think we have a good idea that it won’t, but we don’t know for sure. Under such conditions, and with Rio Tinto’s share price dangling midway between its two recent extremes, the firm strikes me as a big no-no for either a long- or a short-term speculation.

With Rio Tinto, the firm adds no value to the finished product that might help it to filter out some of the wilder and more transient macro-economic fluctuations. The firm is as commoditised as it’s possible to become. Perhaps I’m better off investing in a ‘proper’ firm producing ‘proper’ goods or services, which has potential to expand if it does well. I don’t think Rio Tinto is a promising capital-growth investment, as the characteristics of the industry seem more closely aligned with gambling and guess-work than with considered and researched investing.

What now?

Rio Tinto is not for me at the moment, although I would consider a short-term punt if the inflexion point of the share price seemed more clearly defined — perhaps when profits were at a multi-year low, for example.

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.

Kevin Godbold 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »