Over the past six months, the Rio Tinto (LSE:RIO) share price has dropped 11%. Over a year, it’s down 3%. Particularly in the past couple of months, the FTSE 100 stock has struggled to rally, despite the index as a whole performing positively. Despite this, I’m thinking of adding more Rio Tinto shares to my portfolio. Here’s why.
The year so far
I first bought Rio Tinto shares near the beginning of the year, as I thought that metals and other commodities could outperform. This was true for much of the early part of the year. As a result, the stock did well as it mines for products such as iron ore, copper and lithium. The more in demand these products are, the higher the price that can be charged.
This ultimately helps revenues for Rio Tinto to rise and has a knock-on impact to the share price. However, there have been some issues as we came into early summer.
Concern around the lack of recovery in China caused some investors to worry about the implications for Rio Tinto. After all, China’s the leading consumer of key metals due to the construction sector.
Another problem arose in July when the Q2 report showed that iron ore production fell by 2% versus the same period a year back. This was blamed on supply issues that can be rectified.
Why I’m still optimistic
The stock’s now back at levels seen in Q1, I think I’m going to buy the dip here. Part of the reason relates to the valuation. The price-to-earnings ratio has fallen below 10, which is my fair value benchmark. It sits at 8.85, which flags up to me a potential undervaluation.
The move lower in the share price has also acted to boost the dividend yield. It’s currently at 6.78%, well above the FTSE 100 average yield. With my income hat on, this makes it enticing to buy.
Further, my view on key commodities hasn’t changed. When we talk about the hardware (like batteries) that goes into developing artificial intelligence (AI) and electric vehicles (EVs), it needs the likes of copper, lithium and more. The commercial uses of these products is large and only going to grow. Therefore, I think Rio Tinto’s well placed to take advantage of this.
The long-term view
Of course, I need to be patient here. The risk is that continued poor sentiment weighs over the stock for the rest of the year. But that’s why I can sit back and be happy with the dividend income in the meantime. In the long run, I expect the share price to move back higher to a fairer value, buoyed by demand from China, AI and EVs.
This post was originally published on Motley Fool
