Why I Would Stay Away From Rio Tinto plc And Glencore PLC

Rio Tinto plc (LON: RIO) and Glencore PLC (LON: GLEN) are wasting shareholder cash buying back stock.

| 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.

As a shareholder, I like to know that the management of the company I’m part of is intelligently using shareholder funds. With this in mind, I’m always on the lookout for expensive or ill-fitting acquisitions, excessive management payment packages, or poorly timed stock buybacks.

And two companies that have both unveiled multi-billion dollar stock buyback plans during the past twelve months are Rio Tinto (LSE: RIO) and Glencore (LSE: GLEN). Unfortunately, both of these plans appear to be a waste of money.

Now I’m not against buybacks entirely. Used correctly they can be a tax-effective way to boost shareholder returns. Nevertheless, buybacks only make sense if the company in question has a 1) strong balance sheet; 2) stable earnings; 3) can find no other ways to deploy cash and achieve a higher return.

Rio and Glencore have none of these three traits.

Weak balance sheets 

Glencore has put in place a $1bn stock buyback allowance, while Rio has implemented a $2bn allowance. But even though these are welcome returns to shareholders, the funds could be put to better use elsewhere. 

For example, both companies have faced pressure from analysts regarding their weak balance sheets over the past twelve months.

Glencore has $15bn in gross debt supporting its trading and marketing arm, which is set to provide 45% group profit this year. However, Glencore’s credit rating of BBB is only one level above junk.

A downgrade to junk would seriously impeded the group’s trading and marketing ability. To avoid a downgrade Glencore could be forced to sell assets, cut its dividend or reduce capital spending. With this being the case, a $1bn stock buyback seems to be a waste of shareholder cash. 

Additionally, Rio’s gearing will rise from 19%, to 21% following its $2bn stock buyback. This isn’t huge change. Nonetheless, at a time when the price of iron ore is collapsing and demand for the commodity is stagnating, it would be more prudent to hold  cash for a rainy day, not spend it buying back stock. 

Expansion 

Rio and Glencore could also use cash earmarked for buybacks to buy up struggling peers.

Indeed, many publicly traded mining companies are currently trading at multi-year lows, offering plenty of options for the astute deal maker. Glencore and Rio could be making use of this opportunity to bolt-on some growth at low prices.

This strategy is likely to yield better results over time for shareholders than buying back stock. 

The bottom line

All in all, rather than spending shareholder funds on buybacks both Rio and Glencore should be looking to strengthen their financial positions and make acquisitions.  

That’s why I’m avoiding these two miners and looking elsewhere for deals.

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 Hargreaves 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

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »