Should I Buy Rio Tinto plc (ADR) (RIO) for My ISA?

LONDON — We’re reaching the end of the current ISA year, so which companies should you be looking at for a last minute top-up? I reckon the tax-efficient investment wrapper is best suited to decades-long investing in solid blue-chip shares.

One great approach is to transcend the short- and medium-term ups and downs of cyclical sectors, and tuck some cyclical shares away when they’re cheap. That means companies such as Rio Tinto plc (ADR) (NYSE:RIO) (LSE:RIO), the FTSE 100 miner of iron, aluminum, copper and other metals and minerals.

All share-price appreciation in an ISA is tax-free and there is no additional tax to be paid on dividends. But don’t forget, this year’s allowance of £11,280 must be used up by April 5 — just click here for more ISA information.

Why buy now?
Every company that digs up metals and minerals tends to see profits go up and down in tune with the world’s economies — demand and prices are higher during economic booms, and lower during busts.

The recession in the West, coupled with a slowdown in Chinese demand, is really the only reason that mining shares have been stagnating over the past couple of years. In the long run, demand will almost certainly rise again and prices will surely recover. If we can buy in when the economic cycle is not riding high, and when major investors are keeping away because they’re focused more on the short term, we should hopefully power up our ISAs nicely.

Current valuation
Though things have been improving over the past few months, at 3,314 pence today, Rio Tinto plc (ADR) (NYSE:RIO) (LSE:RIO)’s shares are down nearly 30% from their peak of 4,712 pence from 2011. Earnings per share fell by 38% for the year to December 2012, which is not great, but it is largely in line with the sector. And the full-year dividend for the year was actually raised by 15% to 167 cents per share (approximately 104 pence) — that’s a yield of 3.1% on the current share price.

Forecasts for the next two years are looking good, with City analysts expecting earnings to gain 17% for 2013, with a further 12% suggested for 2014. That puts the shares on a forward P/E for this year of only 8.5, which is a lot cheaper than the average FTSE 100 rating of just over 14 — and it drops to just 7.6 for 2014 estimates.