Rio Tinto Group (RIO) explores for mines and processes mineral resources worldwide. The company operates in four segments: Iron Ore; Aluminum; Copper & Diamonds; and Energy & Minerals. It also owns and operates open pit and underground mines, mills, refineries, smelters, power plants, and research and service facilities.
The company’s $8.34 annual dividend yields 13.3% at the current share price. It paid a semi-annual dividend of $4.17 on April 21, 2022. Its dividend payouts have increased at a 36% CAGR over the past five years. RIO has a record of five consecutive years of dividend growth.
While RIO’s stock has declined 5.6% year-to-date, rising commodity prices due to supply chain disruptions and surging demand should bode well for the company. Furthermore, rising infrastructure initiatives, automation of industrial processes, and sustainability objectives could benefit the business.
Here's what could shape RIO's performance in the near term:
Latest Development
This month, RIO opened its most technologically advanced mine, Gudai-Darri. Gudai-Darri will support the future production of RIO's Pilbara BlendTM product, with an estimated life of more than 40 years and an annual capacity of 43 million tonnes.
From the second half of this year, it is planned to boost iron ore production volumes and improve the product mix from the Pilbara. The mine is projected to be fully operational in 2023.
Also, this month, RIO sought proposals to develop large-scale wind and solar power in Central and Southern Queensland to power its aluminum assets, fulfill its climate change aspirations, and boost renewable growth and industry in the region.
The method, through a formal market Request for Proposals (RFP), is designed to assist the construction of many new wind and solar power projects that may, in tandem with firming solutions, start delivering electricity to RIO's Gladstone facilities through the Queensland grid by 2030.
Strategic Acquisition
In March, RIO completed the $825 million acquisition of the Rincon lithium project in Argentina (FIRB), following clearance from Australia's Foreign Investment Review Board.
Rio Tinto CEO Jakob Stausholm stated, "Rincon strengthens our battery materials business and positions Rio Tinto to meet the double-digit growth in demand for lithium over the next decade, at a time when supply is constrained. We will be working with local communities, the Province of Salta, and the Government of Argentina as we develop this project to the highest ESG standards."
Strong Profitability
RIO's trailing-12-months net income margin of 33.2% is 283.6% higher than the industry average of 8.7%. Also, its ROC, EBITDA margin, and ROA are 267.9%, 148.1%, and 292.9% higher than the respective industry averages.
Furthermore, its gross profit margin of 49.4% is 54.9% higher than the industry average of 31.9%.
Discounted Valuation
In terms of forward Non-GAAP P/E, the stock is currently trading at 5.40x, 49.1% lower than the industry average of 10.61x. Also, its forward EV/EBIT of 3.77x is 58.5% lower than the industry average of 9.10x. Moreover, RIO's forward Price/Cash Flow of 4.44x is 28.5% lower than the industry average of 6.21x.
Consensus Rating and Price Target Indicate Potential Upside
Of the four Wall Street analysts that rated RIO, two rated it Buy, and two rated it Hold. The 12-month median price target of $93.00 indicates a 48.3% potential upside. The price targets range from a low of $93.00 to a high of $93.00.
POWR Ratings Reflect Solid Prospects
RIO has an overall grade of B, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. RIO has a B grade for Quality and Value. RIO's strong profitability is consistent with the Quality grade. In addition, the company's lower-than-industry multiples are in sync with the Value grade.
Of the 36 stocks in the C-rated Industrial – Metals industry, RIO is ranked #8.
Beyond what I stated above, we have graded RIO for Sentiment, Stability, Growth, and Momentum. Get all RIO ratings here.
Bottom Line
RIO is on track to deliver solid growth in the coming months based on its various strategic initiatives and acquisitions to boost its operational performance portfolio.
Additionally, given the favorable analysts' price targets and the company's solid profitability, the stock should rebound in the near term. So, we think the stock could be an ideal investment now.
How Does Rio Tinto Group (RIO) Stack Up Against its Peers?
RIO has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the same industry with an A (Strong Buy) rating: Ryerson Holding Corporation (RYI), BHP Group Ltd. (BHP), and Marubeni Corporation (MARUY).
RIO shares were trading at $62.98 per share on Monday afternoon, up $0.26 (+0.41%). Year-to-date, RIO has gained 0.26%, versus a -17.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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