The Rio Tinto (LSE: RIO) share price has fallen by more than 20% over the last month as investors have reacted to falling iron ore prices.
The big miner’s share price now appears to be in danger of breaching the £45 level it touched in November last year. With a 10%+ dividend yield forecast this year, should I see any further falls as a buying signal?
Why I like Rio Tinto
Rio Tinto is certainly a business I’d be happy to invest in at the right price. I like the company’s big, low-cost Australian iron ore mines, which are among the largest and cheapest in the world. I’m also attracted to Rio’s growing exposure to energy transition metals such as copper.
As a former shareholder, I know that Rio has a long history of generous dividend payouts. Right now, the company’s dividend is at all-time record levels. Over the last 12 months, a total of 756p per share has been paid to shareholders. That’s equivalent to a trailing dividend yield of 16%!
Of course, past performance is no guarantee of future returns. But Rio has always prioritised dividends. As an income investor, that’s important to me.
Conditions may be changing
Mining is a notoriously cyclical business. Over the last two years, trading conditions have been very good for Rio Tinto. The price of iron ore hit record highs of more than $210/tonne in June 2021, as demand soared. Rio’s share price peaked at more than £60.
However, the mood of the market seems to be changing. Investors are worried about the risk of a global recession and have been selling off commodities. Iron ore has dropped by nearly 50% to $110 per tonne. Rio’s share price has also been falling.
One particular worry is that demand from China could slow — the Asian powerhouse is by far Rio’s largest iron ore customer.
Rio Tinto shares: the right price to buy?
Right now, iron ore prices are still higher than they were before the pandemic. In my view, Rio is only just starting to roll off the top of a boom period.
For this reason, I think the stock’s current valuation could be misleading. Although current forecasts price shares on five times forecast earnings, with a 14% dividend yield, I need to remember that these are near-record earnings.
Broker forecasts suggest Rio’s profits will fall by 15%-20% each year from 2022 to 2024. The dividend is expected to fall too, with the payout halving over the next two years. That implies a 2024 dividend yield of 7%, at today’s share price.
That’s still an attractive level of income, in my view. If market conditions stay strong, I could do well by investing at this level.
However. I’m worried that the outlook is uncertain. I’d also note that broker earnings forecasts have recently been cut. I suspect there’s worse to come.
In my view, a share price of £45 is still pricing in a fairly strong outlook. Although I’d like to buy Rio Tinto shares as a long-term holding, I want to buy them when they’re really cheap. I don’t think I’m there yet.
