Around seven weeks ago, my wife and I decided to buy more cheap shares in quality UK companies. On 29 June, we bought into four FTSE 350 businesses, one of which was mega-miner Rio Tinto (LSE: RIO). While our three other shares are already showing paper gains, Rio stock has been the worst performer by far. So should we cut our losses by selling, should we hold on, or buy more shares?
Rio Tinto shares slump
At its 52-week high on 3 March, the Rio Tinto share price briefly hit 6,343p. It then zigzagged along, closing at 6,091p on 7 June. Alas, it’s all been pretty much downhill since then, with the shares crashing over the past six weeks. Here’s how they have performed over six timescales, based on the current price of 4,727.5p:
| Five days | -4.4% |
| One month | 0.4% |
| Six months | -16.3% |
| 2022 YTD | -3.4% |
| One year | -14.6% |
| Five years | 37.9% |
Rio Tinto stock has lost almost a sixth of its value over six months and slightly less over one year. Then again, its has comfortably beaten the wider FTSE 100 index (+2.5%) over five years. All these returns exclude cash dividends (which would add multiple percentage points each year to returns). So what’s gone wrong for this popular share lately?
Metal prices have crashed
During 2020-21, commodity prices soared, delivering bumper cash flow, earnings and dividends to Rio Tinto and its global mining peers. However, prices of base metals such as aluminium, copper, iron ore and zinc have slumped from their early 2022 highs. This will have a negative impact on Rio’s ongoing earnings, which explains why the Anglo-Australian giant’s shares have been battered.
Rio’s share fundamentals look cheap to me
After their recent price collapse, Rio Tinto shares look lowly rated to me. They trade on a price-to-earnings ratio of 5.3 and a corresponding earnings yield of 18.8%. But these are trailing (backward-looking) figures and, therefore, are likely to look worse in Rio’s next set of results.
Even so, the group’s whopping dividend yield of 11.2% is the second-highest in the FTSE 100, according to my most recent stock screen. And while this is comfortably covered almost 1.7 times by current earnings, this multiple is set to fall. Also, no company dividend is guaranteed — and I recall that Rio Tinto cut its cash payout in 2016.
Sell, hold or buy?
Since we bought this high-yielding stock for our family portfolio, it has lost roughly 9.2% of its value. But as a long-term value investor, I see no reason to sell our Rio Tinto shares just yet. For example, even if the board were to halve the company’s dividend, it would still be a market-beating 5.6% a year. That’s 1.4 times the FTSE 100’s yearly cash yield of 4%. So we’re definitely going to hang onto our holding in Rio for now. But should we buy more shares?
If the choice were mine, I would definitely take the risk of buying more Rio Tinto stock at these lower prices. But my wife would prefer to diversify her holdings by buying quality stocks we don’t yet own. So we must politely decline on this occasion. However, I suspect we will be back to buy more shares in this £79bn Goliath later in 2022!