LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
With the shares at 3413p, Rio's market cap. is £48,180 million.
This table summarises the firm's recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Net cash from operations ($m)||14,883||9,212||18,277||20,030||9,368|
|Adjusted earnings per share (cents)||656.2||357.1||713.3||808.5||503.1|
|Dividend per share (cents)||112.35||45||108||145||167|
2012 was a challenging year for Rio Tinto, which finds, mines, and processes mineral resources. Despite underlying earnings of $9.3 billion, the firm posted $14.4 billion in writedowns that led to it taking a headline net loss of $3.0 billion. The company's major products are aluminium, copper, diamonds, thermal and metallurgical coal, uranium, iron ore, gold, and industrial minerals like borax, titanium dioxide and salt. Activities span the world and the firm has a significant presence in Australia, North America, Asia, Europe, Africa and South America.
The twin effects of softening commodity prices and rising costs, particularly in its aluminium and energy businesses, caused Rio problems and led to the loss. However, in recent news, there has been change at the top with a new CEO and a new CFO, both highly financially incentivised positions. In words that will sound like music to investors, Sam Walsh, the incoming CEO, said that under his leadership Rio would have, "... an unrelenting focus on pursuing greater value for shareholders. To do this we need to run the business as owners not managers and my immediate priority is to build more focus, discipline and accountability throughout the organisation."
So Rio has become something of a turnaround proposition within the broader frame of its cyclical nature. If commodity prices hold up from here, and if the new management team can deliver on its recovery plan, the outlook for investor total returns could be promising.
Rio Tinto's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
1. Dividend cover: adjusted earnings covered last year's dividend just over three times. 4/5
2. Borrowings: net gearing around 33% with net debt around 90% of adjusted earnings.4/5
3. Growth: revenue, earnings and cash flow have all been bumpy. 1/5
4. Price to earnings: a forward eight or so compares well to earnings and yield forecasts. 4/5
5. Outlook: weaker recent trading and a cautiously optimistic outlook. 3/5
Overall, I score Rio 16 out of 25, which makes me cautious about the firm's potential to out-pace the wider market's total return, going forward.
Under-control borrowings and a well-covered dividend are obvious positives. Volatile commodity prices and rising costs have delivered a patchy business-growth record but the valuation reflects such issues. Having new management with a recovery plan makes the optimistic outlook sound convincing. All of which encourages me to believe that, yes, I should invest in Rio Tinto.
To demonstrate their confidence, the directors recently hiked the dividend by 15% and new investors will enjoy a forward yield predicted to be around 3.7% at current share-price levels. That's not bad, but other attractive yield situations are out there, and the Motley Fool's top value investor has discovered what he believes is the best income generating share-play for 2013. He set's out his three-point investing thesis in a report called "The Motley Fool's Top Income Share For 2013", which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star,click here.
Kevin Godbold has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.