Rio Tinto (LSE: RIO) shares haven’t taken part in the global stock market rally this year. Over the last six months, they’ve fallen about 19%.
Is this a good opportunity to pick up a blue-chip FTSE 100 company at a great price? Let’s discuss.
Low valuation and high dividend yield
At first glance, the shares do look attractive right now.
For starters, they are trading at a discount to the market from a valuation perspective. Currently, Rio Tinto has a forward-looking price-to-earnings (P/E) ratio of about 9.7 versus the UK market average of around 13.3. So there could be some value on offer here.
Secondly, there’s a juicy dividend yield. Currently, the consensus dividend forecast for 2023 is $4.03 per share. At today’s share price and exchange rate, that equates to a yield of over 6%.
An unpredictable business
One thing to be aware of here however, is that Rio Tinto’s revenues, profits, and dividends are unpredictable and tend to fluctuate a lot.
This year, for example, profits have taken a big hit due to lower iron ore prices. For the first half of 2023, the company generated underlying earnings per share of $3.53 versus $5.35 for H1 2022.
As a result of this drop in earnings, Rio slashed its H1 dividend by 34% to $1.77 per share, in a disappointing development for income investors.
Personally, I’m not a big fan of businesses that have unpredictable revenues and profits. This is due to the fact that their share prices can swing wildly.
To my mind, investing in these kinds of businesses is akin to gambling because investors really have no idea how they will perform.
What’s next for Rio Tinto?
Now, Rio’s business performance could pick up from here. If the Chinese economy – which is really struggling right now – gets going, we could see iron ore prices strengthen. This would most likely boost Rio Tinto’s revenues, profits, and share price.
However, there are no guarantees this will happen. It’s worth noting that there are quite a few analysts and brokers who aren’t so bullish on the prospects for iron ore right now. For example, UBS expects prices to fall to $100/tonne in 2024 (versus around $115/tonne now) while Goldman Sachs and Fitch Solutions forecast prices of $93/tonne and $90/tonne respectively.
Better stocks to buy?
Given the unpredictable nature of this business, my view is that there are better shares to buy today.
I think investors are better off going for companies that are pretty much guaranteed to grow their revenues and profits in the years ahead.
If bought at a reasonable price, these types of companies should offer a better risk/reward proposition than Rio Tinto shares, in my view.
You can find plenty of information on these higher-quality shares right here at The Motley Fool.
