It may seem rather strange to be discussing Rio Tinto (LSE: RIO) as a top income play and talking about British American Tobacco’s (LSE: BATS) long-term potential. After all, mining stocks are hardly renowned for their dividend potential, while smoking seems to be getting less popular over time. However, both stocks offer a potent mix of exciting growth potential and strong yields. As such, they could be star performers. Here’s why.
Differing Fortunes
2014 has been a very different experience for investors in Rio Tinto than it has been for their counterparts in British American Tobacco. That’s because a tumbling iron ore price has put pressure on the bottom line and has meant that shares in Rio Tinto have fallen by 6% since the turn of the year. On the flip side, British American Tobacco’s shares are up 11% as the company overcomes declining cigarette volumes with a mix of higher prices and cost cutting initiatives.
Growth Potential
Despite their differing performance thus far in 2014, both companies have tremendous long term potential. In Rio Tinto’s case, demand for its main export, iron ore, could have a buoyant long-term future as the global economy picks up momentum and emerging markets such as China and India continue their vast spending on infrastructure projects.
For British American Tobacco, the future seems to be e-cigarettes. Not only do they appear to be less harmful than ‘normal’ cigarettes, they are proving to be popular among younger people and this bodes well for the company’s longer-term future. Furthermore, British American Tobacco stole a march on many of its rivals by entering the market at a very early stage, which can only serve to help the building of brand loyalty over the medium to long term.
Looking at the nearer term, Rio Tinto is expected to increase earnings per share (EPS) by 7% in 2015, while British American Tobacco’s bottom line is all set to grow by 8% next year. Both of these growth rates are above the market average and highlight that the short term, as well as long term, looks bright for the two stocks.
Income Potential
With shares in Rio Tinto and British American Tobacco both yielding 4%, they offer a very respectable yield. However, their attraction as income stocks really starts to make sense when their dividend per share growth potential is taken into account.
For example, Rio Tinto is expected to increase dividends per share by 8.1% next year, while British American Tobacco is forecast to bump its dividends up by 7.5%. This means that the two companies could be yielding 4.3% and 4.4% next year respectively, with further dividend per share growth expected in future years.
