This is a fascinating time to be a UK stock investor as there are some massive dividend yields available at bargain prices.
Normally, when I spot a company offering a double-digit yield, I approach with extreme caution. All too often it suggests trouble. It could well mean the yield is only flying because the share price is crashing.
So I am fascinated to see global commodity giant Rio Tinto (LSE: RIO) yielding a stonking 14.6%. You see, I don’t think the company is in particular trouble, unless I’m missing something here.
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I like the look of this stock
Rio Tinto shares have fallen 13.61% in the last six months, which partly explains the high yield. Over five years, the performance is still positive, up 29.64%. That compares to a drop of 5.43% across the FTSE 100 as a whole.
Investors are worried about the impending recession, which will hit commodity demand as the economy shrinks rather than grows. China is a particular worry. For years it has been the world’s biggest consumer of metals and minerals, making up around 60% of global demand. That was in the days when the country’s GDP routinely grew by double digits.
This year it will grow by just 2.8%, according to the World Bank. It doesn’t help that premier Xi Jinping locks down the economy every time Covid raises its head. The oversupplied property market is another concern. China’s steel production and consumption fell 9% year on year, Rio says. No country is stepping up to replace this demand.
Commodity stocks are supposed to offer protection against inflation, which is rampant right now. Prices did soar early in the war in Ukraine, but have declined steadily as interest rates rise in the US and Europe, and recession fears grow.
Last month, Rio reported that aluminium prices fell another 20% in the third quarter, with copper down 7%. The company’s shipments of bauxite, aluminium, iron ore and refined copper are all being squeezed.
Surely any sensible investor should wait for the storm to pass, and buy it next year when the outlook will hopefully be brighter? I don’t see it that way. Current problems look like a buying opportunity to me.
Rio Tinto looks like a buy to me
Rio Tinto is now incredibly cheap, trading at just 4.1 times earnings. The 14.6% yield is covered 1.7 times by earnings. It is forecast to slip to 10.7%, but that is more than today’s 10.1% inflation rate, and still boasts healthy cover of 1.7.
Better still, Rio has net cash of £1.3bn. That’s a real bonus, particularly at a time when debt servicing costs are rising.
The long-term demand outlook looks positive as the world shifts to renewables, which should drive demand for aluminium, copper, iron ore and lithium.
I had been lining up Unilever as my next purchase, but Rio might just leapfrog it now to become my next purchase as soon as I have some cash to hand. A well-covered yield of 14.6% is going cheap. How can I say no to that?
