At What Price Would Rio Tinto plc Be A Bargain Buy?

G A Chester explains his bargain-buy price for 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.

Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.

Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.

Today, I’m going to tell you the price I think would put FTSE 100 mining giant Rio Tinto (LSE: RIO) (NYSE: RIO.US) in the bargain basement.

Should you invest £1,000 in M&G 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 M&G made the list?

See the 6 stocks

Pricing power

Markets generally give companies with ‘pricing power’ a higher earnings rating than those that lack it. As Buffett has said: “You’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business”.

Companies with pricing power include those with powerful brands, such as Buffett favourite The Coca-Cola Company, and UK premium spirits group Diageo. These sorts of companies tend to trade on well-above-average price-to-earnings (P/E) ratios, while companies in industries with poor pricing power are often found at the lower end of the P/E range (except when the industries are booming).

There’s not much that miners can do about pricing. Rio Tinto’s iron ore is little different to the iron ore of any other miner. Iron ore is iron ore. As such, while I would consider Diageo, for example, to be in the bargain basement even at a bit of a premium to the FTSE 100 long-term average P/E of 14, my bargain value for Rio is considerable lower.

At what price a bargain?

My bargain-basement rule of thumb for a megacap company in an industry with poor pricing power is a 12-month forecast P/E of below 10. The forward earnings consensus for Rio is about 300p a share, which means I would be looking for a share price of under 3,000p.

Since Rio’s empire-building chief executive Tom Albanese was sacked in 2013, new boss Sam Walsh has been intent on delivering “greater value for shareholders”, including improving cash flow and dividends. Because of this, I’m comfortable applying dividend yield as a double-check marker of value, as I do for other megacap natural resources companies, such as oil giant Shell.

My bargain-basement rule of thumb on this metric is a 12-month forecast yield of at least a third above the market average. Rio’s forward yield at 3,000p works out at 4.7%, which is pretty much bang on 133% that of the FTSE 100.

My P/E and yield requirements, then, are both telling me Rio would be a bargain buy at a price of up to 3,000p. The shares are not much above that at the time of writing, having closed on Friday at 3,039p.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

G A Chester 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 black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »

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 »