With the S&P/ASX200 Index (INDEXASX: XJO) riding high, there aren't many blue-chip stocks quite as appealing as Rio Tinto Limited (ASX: RIO).
Sure, it doesn't offer the dividend yield of Insurance Australia Group Ltd (ASX: IAG), but it does have a number of other promising characteristics which give me confidence in its ability to grow shareholder wealth over the ultra-long term.
- World's lowest cost of production. In the resources sector, quality and cost of production are everything. Rio Tinto's Pilbara operations have the lowest cost iron ore production in the world with a cash cost of around $US20.40 per wet metric tonne. The mines also produce an excellent quality ore, thus maximising what it receives for its product. With the spot price currently around $US90 per tonne and an all-in sustaining cost below $US50, it leaves a strong profit margin on Rio's seaborne ore. It also suggests more higher-cost producers (such as those in China) will be forced out of the market in the coming year.
- Increased cash flow and dividends. Thanks to aggressive capex and cost cuts, enviable profit margins and growing cash flows, Rio's CEO Sam Walsh said the miner's solid performance in 2014, "will result in materially increased cash returns to shareholders". Currently, Rio shares change hands on a trailing fully franked dividend yield of 3.4% (4.9% grossed-up), but analysts are forecasting dividends to rise up to $2.90 per share in 2016.
- Growth potential. Whilst Rio is facing the prospect of falling iron ore prices head-on, it is busy ramping up production of the steelmaking ingredient to counter the lower prices. In addition a number of its other commodities such as aluminium, coal and uranium have been adversely affected by depressed prices for many years. Bauxite and copper are two commodities from which management will seek long-term growth.
A better dividend stock than Rio Tinto – Yours FREE!
