From the relatively slow increase in the FTSE 100 index over the past few months, it does not appear to be a particularly good time for its constituent companies. But the overall picture hides the fact that companies in at least some of the index’s segments have actually boomed. Boomed so much, if fact, that their dividend yields are at unheard-of levels.
One of them is industrial metal miner Rio Tinto (LSE: RIO), whose dividend yield is expected to be just shy of 18% for 2021, as per AJ Bell estimates. With a yield of 17.8%, Rio Tinto has also contributed most to dividend growth among all FTSE 100 companies as per these estimates.
Dirt-cheap FTSE 100 stock
This makes the stock attractive enough to me, but let me also add that it is dirt-cheap. Yes, you read that right. After reaching multi-year highs in May this year, the company’s share price has crashed by more than 28%. At present, its price-to-earnings (P/E) ratio is 5.7 times, which is minuscule even by comparison to some of the other miners. Glencore, for instance, has a huge P/E of 35 times and even BHP‘s is 12.3 times. The average FTSE 100 P/E is also around 20 times, which makes a case for me to buy Rio Tinto while it is still down.
Robust earnings for Rio Tinto
This is especially so since Rio Tinto turned in an impressive performance at the last count. The company’s revenue grew by 71% and net earnings grew by a whole 271% for the first half of 2021 compared to the same time the year before. I think it is also a good stock for me to hold in a time of rising inflation, because it happens to be on the right side. One of the reasons for the rise in prices is the huge demand for commodities, which actually benefits Rio Tinto and other miners since they produce them.
The downside
However, the party maybe about to slow down. Prices for iron ore, for instance, which is the biggest contributor to the company’s earnings, are expected to slow down first over the rest of this year and even more so in 2022, as per Bank of America estimates. Other iron miners like the FTSE 250 stock Ferrexpo have seen a similar crash in prices, ostensibly on bearish iron price prospects.
Rio Tinto’s latest production update was also disappointing. It reported a reduction in production across iron, aluminium, and copper for both the latest quarter and the first nine months of the year, in comparison with respective periods during the year before.
What I’d do
Still, I think there is a whole lot of pessimism surrounding the stock, considering that its share price is almost back to where it was last year despite its performance. Going by its dividends though, as well as the fact that historically it has paid these fairly consistently, it is a buy for me.
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Manika Premsingh owns shares of Ferrexpo, Glencore and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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