I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.
Right now, I reckon Rio Tinto (LSE: RIO) (NYSE: RIO.US) is looking a great buy for income.
Just over a year ago, Rio’s chief executive, Tom Albanese, stepped down after the company announced $14bn of writedowns on past acquisitions. New boss Sam Walsh shook up the management team, and promised improved capital discipline and productivity, “to put us firmly on the path of delivering greater shareholder value“.
Annual results released last month showed Rio meeting or bettering all the targets set out by Walsh for 2013: capital spending was cut 26% to $12.9bn, costs were cut by $2.3bn and net debt reduced to $18.1bn, down 18% over six months.
Most significantly, for income investors, cash flows for the year were boosted 22% to $20.1bn, well ahead of market expectations. Rio hiked the final dividend by 15% to 108.5 cents — 10 cents higher than analysts had been forecasting. Walsh said on a conference call: “That’s the real proof in the pudding that we’re delivering greater shareholder value.”
A great opportunity right now
Rio’s shares were pushed up to a 52-week high of 3,628p in the wake of the results, but have been knocked back 13% — to 3,140p at the time of writing — due to recent geopolitical concerns over the situation in Crimea and uninspiring data out of China.
The weakness in Rio’s shares has pushed the historic yield up to an above-market-average 3.8%. That’s 0.2% below the yield of fellow mining giant BHP Billiton. Now, I’ve highlighted BHP Billiton in the past, but when its yield was 0.6% above Rio’s. Right now, I think Rio is well worth looking at for income for several reasons:
- Analysts are forecasting Rio to deliver annual dividend growth a couple of percentage points ahead of BHP Billiton for the next two years
- Recent history shows analyst forecasts have consistently underestimated Rio’s dividend, while being pretty much on the button with BHP Billiton’s
- Rio has more to prove than BHP Billiton in terms of delivering shareholder value, providing a strong incentive for Rio to use its dividend to prove its credentials
Rio’s recent results show the new chief executive is delivering on the vision he set out a year ago; and he clearly sees dividend growth as the big marker of success. With the recent weakness in the shares pushing the historic yield up to 3.8%, and expectations of strong dividend growth to come, I reckon Rio is looking very attractive right now for its prospective income stream.