Is Rio Tinto the Ultimate Retirement Share?

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, and annuity rates have plunged. There's no sign things will improve anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way to protect yourself from the downturn, however, is to build 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 U.K. large caps that have the potential to beat the FTSE 100 (INDEX: ^FTSE  ) over the long term and support a lower-risk, income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, we'll take a look at Rio Tinto (LSE: RIO.L  ) (NYSE: RIO  ) , a global mining giant whose biggest business is in iron ore.

Boom boom
First, let's take a look at how Rio Tinto has performed against the FTSE 100 over the last 10 years:

 

2007

2008

2009

2010

2011

Trailing 10-Year Average

Rio Tinto Total Return

98.2%

(70.2%)

131.3%

34.1%

(28.8%)

13.7%

FTSE 100 Total Return

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 $38 billion acquisition of aluminum maker Alcan in 2007. By 2009, Rio Tinto was struggling with the resulting debt and was forced to raise $15 billion from shareholders. Since then, things have stabilized, and the company, like its peers BHP Billiton and Anglo American, has made huge profits by 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 fueled 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:

The basics

Year Founded

1873

Market Cap

45 billion pounds

Net Debt

7.6 billion pounds

Dividend Yield

2.9%

Five-year average financials

Year Founded

1873

Market Cap

45 billion pounds

Net Debt

7.6 billion pounds

Dividend Yield

2.9%

Source: Morningstar, Digital Look, Rio Tinto.

Here's how I've scored Rio Tinto on each of these criteria:

Criterion

Comment

Score (out of 5)

Longevity

Rio Tinto was founded in London 139 years ago.

5

Performance vs. FTSE

The stock outperforms but loses some credit for excessive volatility.

3

Financial Strength

Much improved, but concerns remain over its investment commitments.

4

EPS Growth

A respectable average but likely to be at risk as China slows.

3

Dividend Growth

The yield is modest, but decent growth is funded by high profit margins.

3

 

 

Total: 18/25

A score of 18 out of 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.

Expert selections
Doing your own research is always important, but one effective way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who has outperformed the wider index by a staggering 305% over the last 15 years. You can learn about his top holdings and how he generates such fantastic profits in this free report: "8 Shares Held By Britain's Super Investor."

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

Roland does not own any of the shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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