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Is It Still Safe to Buy Rio Tinto plc (ADR) (RIO)?

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LONDON — I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market could be overheating.

So right now I’m analyzing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy.

Rio Tinto plcToday I’m looking at one of the world’s largest mining companies, Rio Tinto plc (ADR) (LSE:RIO) (NYSE:RIO), to determine whether the shares are still safe to buy at 2,880 pence.

So, how’s business going?

Rio Tinto plc (ADR) (LSE:RIO) (NYSE:RIO) has fallen out of favor with investors recently after the firm announced that its underlying earnings for 2012 had fallen 40%. Moreover, at the same time the company revealed that it had been forced to take an impairment charge of $14.4 billion on some of its assets. As a result, Rio Tinto plc (ADR) (LSE:RIO) (NYSE:RIO) had to report a loss of $3 billion for 2012.

However, it appears that Rio’s management is taking action to reverse these losses and bring the company back into profit.

In particular, management has slashed capital expenditure spending for the year from $17 billion down to $13 billion. In addition, the company is targeting $3 billion of cost savings by the end of 2014.

The company is also ramping up production at some of its largest mines in an attempt to offset falling commodity prices.

Furthermore, the company is selling non-core assets and has sold 20 in the past five years, achieving nearly $14 billion in proceeds.

Expected growth

As noted above, Rio Tinto plc (ADR) (LSE:RIO) (NYSE:RIO) made a loss during 2012 due to asset impairments. However, many City analysts expect Rio to return to growth in the next two years.

City forecasts currently predict earnings of $5.55 per share for this year and $6.24 for 2014.

Shareholder returns

Compared to its peers, Rio Tinto plc (ADR) (LSE:RIO) (NYSE:RIO) offers its investors some of the best returns in the mining sector. Indeed, during 2012 the company returned around 50% of its underlying earnings to shareholders through buybacks and dividends.

City analysts expects a dividend of $1.80 per share for 2013, an increase of 8%. Furthermore, Rio’s dividend yield is currently 3.7%, larger than that of its peers in the mining sector, which currently offer an average dividend yield of 3.4%.

Valuation

As Rio made a loss during 2012, it is not possible for me to calculate a trailing P/E ratio for the company. That said, based on City estimates for earnings next year, I believe that the company is currently trading at a forward P/E ratio of 7.7, while its peers trade on an average historic P/E of around 8.

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