George Soros, one of the best hedge fund managers of all time, once famously said: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” Unfortunately, most investors ignore this critical piece of advice, which holds back returns.
The best way to be a successful long term investor is to buy a selection of high-quality shares, reinvest the dividends, and forget about your portfolio. Over time such a strategy will yield tremendous results, with little effort on your part. Dividends are also crucial as studies have shown that over the long term, they account for more than half of equity returns, and that’s why I believe Rio Tinto (LSE:RIO) could make you rich.
Complete transformation
Over the past five years, Rio has transformed. Management has slashed costs and capital spending with impressive results.
For the first half of 2017, Rio achieved $2.1bn of pre-tax sustainable operating cash cost improvement, six months ahead of schedule. Lower costs helped the firm generate operating cash flow of $6.3bn and an earnings before interest, tax, depreciation and amortization margin of 45%.
With more cash than it knows what to do with, management was able to pay down $2bn of debt, reducing gearing from 17% to 13% year-on-year to $7.5bn. At this rate, the group will have a net cash balance before the end of the decade.
What’s even more impressive is that Rio has been able to reduce debt while increasing cash returns to investors. Alongside the first half figures, management announced an interim dividend of $1.10 per share, for a total of $2bn, and an increased share buyback of $1bn to be completed by the end of 2017.
Dividend champion
As the group continues to generate mountains of cash and pay down debt, its dividend payout should only increase. This year, analysts have the company’s shares yielding 5.9%, but the current forecasts suggest the per share distribution will fall by around 10% next year, giving a yield of 5.3%.
I believe that, given Rio’s healthy cash generation, debt repayments and wide margins, it is unlikely that the payout will fall. Instead, it’s more likely to be held at the current level.
And as well as the attractive dividend profile, shares in the miner also trade at a highly attractive forward (2018) P/E of 10.9.
The one downside to Rio is the cyclical nature of the business. The iron ore miner needs commodity prices to remain elevated to make a profit. That said, the company has the lowest production costs in the industry and it’s unlikely the price of ore will ever fall to the $14 per tonne Rio can produce at. If prices did drop this low, most of the rest of the industry would likely collapse. So the group is, to a certain extent, insulated from market forces by its size.
All in all, if you’re looking for a cheap, dull dividend play, Rio seems to me to be the perfect buy.
