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Stocks for the Long Run: Rio Tinto vs. the FTSE 100

LONDON -- If the long-run return on the market is 9.4% (as researchers at Credit Suisse say), then investing in shares should be a no-brainer; however, all too often our portfolios don't seem to reflect that attractive performance.

This is partly because that 9.4% number is an average derived from 100 years of data. Picking various time periods within that 100 years gives very different outcomes -- and the market almost never actually returns 9.4% in any single year.

Needless to say, unless you're holding a market tracker, your portfolio could have dramatically different results than what the market experiences. If you own a disproportionate amount of winning shares, your returns could be significantly better than the market. On the other hand...

In this series of articles, I'm looking at how individual shares have performed against the FTSE 100 (UKX) during the past 10 years. Today, I'm assessing Anglo-Australian mining giant Rio Tinto  (LSE: RIO.L  ) (NYSE: RIO  ) .

Over the last decade, Rio Tinto's performance has crushed that of the FTSE 100.

Source: S&P Capital IQ

As we can see from the chart above, the ride has been rocky, but since November 2002 Rio Tinto's shares have returned an impressive annual average of 14.5% -- double the FTSE 100's 7.2% (these return calculations assume dividends were reinvested).

Aside from a few years when metal prices collapsed and took the company's earnings with them (2009 leaps to mind) Rio Tinto has generally traded near the market's average P/E of 13 over the past decade, never looking particularly cheap.

Source: S&P Capital IQ and Bloomberg

Similar to BHP, Rio Tinto's fortunes have tracked demand for metals and coal -- mainly from China -- over the past decade. As that country faces a potential transition in its economy, investors need to ask themselves: "How much higher will demand go?"

Given the time it takes to bring new mines into operation, the mining industry is characterized by boom and bust as supply first lags demand and then races ahead. It would appear the market thinks were heading into a bust cycle. What do you think?

Large caps for the long run
As well as Rio Tinto, you can always consider the eight large caps for the long run spotlighted in "Super-Investor Neil Woodford's Favorite Blue Chips." This exclusive Fool report evaluates the FTSE shares the legendary index-trouncing investor is backing today, and the investing logic behind them.

You can read all about the potential long-run winners Woodford currently favors by downloading the exclusive report today -- it's free!

Nate Weisshaar does not own any share 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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10/24/2016 4:01 PM
RIO $33.12 Up +0.25 +0.76%
Rio Tinto CAPS Rating: ***