Is Rio Tinto the ultimate retirement share?
Today, I'm going to take a look at Rio Tinto (LSE: RIO), a global mining giant whose biggest business is in iron ore.
First, let's take a look at how Rio Tinto (LSE: RIO) has performed against its index, the FTSE 100, over the last 10 years:
Total Return 2007 2008 2009 2010 2011 Trailing 10 yr avg.
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Rio's performance has been pretty volatile, thanks in part to the company's massively-overpriced $38bn acquisition of aluminium maker Alcan in 2007. By 2009, Rio Tinto was struggling with the resulting debt and was forced to raise $15bn from shareholders. Since then, things have stabilised, and the company, like its peers BHPBilliton and Anglo American, has made huge profits from meeting China's rapidly growing demands for commodities.
Overall, Rio Tinto has outperformed the FTSE 100 on a total returns basis over the last 10 years, but this performance has been fuelled by the global commodities boom and may slow in the longer term -- although demand for commodities is unlikely to fall in absolute terms.
What's The Score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Rio Tinto shapes up:
Item Value 5 year average financials
Source: Morningstar, Digital Look, Rio Tinto
Here's how I've scored Rio Tinto on each of these criteria:
Criteria Comment Score
|Longevity||Rio Tinto was founded in London 139 years ago.||5/5|
|Performance vs. FTSE||Outperformance, but loses some credit for excessive volatility.||3/5|
|Financial strength||Much improved, but concerns remain over its investment commitments.||4/5|
|EPS growth||A respectable average, but likely to be at risk as China slows.||3/5|
|Dividend growth||A modest yield but decent growth, funded by high profit margins.||3/5|
A score of 18/25 is respectable and I believe that owning shares in Rio Tinto could be a good way to add diversification and a reliable income to a retirement fund portfolio.