Is Rio Tinto the ultimate retirement share?

Rio TintoThe last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund.

Today, I'm going to take a look at Rio Tinto (LSE: RIO), a global mining giant whose biggest business is in iron ore.

Boom boom
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.
Rio Tinto 98.2% -70.2% 131.3% 34.1% -28.8% 13.7%
FTSE 100 7.4% -28.3% 27.3% 12.6% -2.2% 7.1%

Source: Morningstar

(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

Year founded 1873
Market cap £45bn
Net debt £7.6bn
Dividend Yield 2.9%
Operating margin 29.8%
Interest cover 16.4x
EPS growth 10.7%
Dividend growth 20.1%
Dividend cover 6.4x

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
Total: 18/25

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.

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