The threat of a global recession hangs heavy on the dividend outlook for most commodities shares.
Take Rio Tinto (LSE: RIO), for example, a mining company I actually own. City analysts think the annual payout here will fall in 2023 as yearly earnings will slip more than 20%.
Still, an expected dividend of 446 US cents per share still provides a mighty 6.8% yield. That beats the 3.7% FTSE 100 average by a huge distance.
So should I increase my holdings in the business today?
Fragile China
Buying cyclical shares like this can be dangerous, given the threat of a worse-than-expected economic downturn. The danger is particularly high for commodities producers too, given China’s ongoing fight against Covid-19.
Raw materials glutton China is responsible for around 80% of seaborne iron ore demand, to give you an example. Last year, Rio Tinto sourced more than 70% of total earnings last year from the steelmaking ingredient.
Weak Chinese demand therefore could have big implications on the miner’s bottom line and, by extension, on dividends.
That said, I still expect Rio Tinto to pay bigger dividends relative to its share price than most other FTSE 100 shares, even if earnings tank. The company’s healthy balance sheet should help it in this regard too.
A FTSE 100 bargain?
I actually think now is an ideal time to buy the diversified miner. At current prices around £53.90 per share it trades on a price-to-earnings (P/E) ratio of just 9.4 times for 2023. This low valuation more than reflects the risks to next year’s profits forecasts, in my opinion.
I also expect Rio Tinto’s share price to soar over the next 10 years. It’s why I bought the business for my own shares portfolio in the summer.
A number of structural drivers exist that could turbocharge the commodity company’s profits over the next decade. These include:
- Rapid urbanisation in emerging markets, and big infrastructure upgrades in the West, that should increase iron ore demand
- Soaring electric vehicle sales that are tipped to boost lithium and copper consumption
- Rising sales of aircraft, consumer electronics, and household appliances that should supercharge aluminium off-take
- The growing food needs of an expanding global population should bolster borates sales for fertilisers
Benefits of scale
There are reasons why I prefer Rio Tinto other most other mining stocks. The list above shows how broad the company’s product portfolio is. This provides earnings at group level with protection in case demand weakens for certain commodities.
The business is also well spread when it comes to its geographic footprint. Owning mines in many different territories has the advantage of reducing its vulnerability to adverse operating conditions in one or two locations. Political upheaval, natural disasters (like earthquakes) and tax changes are all constant dangers to mining companies.
Rio Tinto also has much more financial clout than the majority of mining businesses. This gives it the means to expand, acquire assets, or to enter fast-growing markets for future growth. It did this earlier in 2022 with the acquisition of Argentina’s Rincon lithium project.
Sure, Rio Tinto faces some significant uncertainty in the near term. But all things considered, I believe it’s one of the best FTSE 100 value stocks right now.
