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Rio Tinto Limited shares fall 2%: Should you buy?

Rio Tinto Limited (ASX: RIO) opened nearly 2% lower today, after climbing 4% yesterday.

Shares in Australia’s second largest iron ore miner popped yesterday following an announcement by the company which said it rebuffed merger discussions with Swiss commodities trader and miner, Glencore Plc, in August.

Glencore, an $83 billion company with a strong presence in nickel, zinc, copper and coal, originally approached the larger Rio in July. The Australian Financial Review reported that Rio consulted investment bank Macquarie Group Ltd (ASX: MQG) over the deal, before knocking it back.

Under UK takeover rules, Glencore is prohibited from making another offer within six months from the date of its first offer.

However it’ll likely do little to deter Glencore CEO, Ivan Glasenberg.

Glasenberg knows Rio shareholders will be watching closely, to make sure the company lives up to its promises.

One of the promises Rio’s management recently made to shareholders was for, “materially increased cash returns.” That is, larger dividends.

Although the spot price of iron ore – which accounts for 90% of Rio’s bottom line – has fallen 41% in 2014, so far analysts are continuing to predict a larger dividend payment in the coming 12 months. Forecasts put it on a yield of 4%, fully franked.

Buy, Hold, or Sell?

According to The Fairfax Press those with intimate knowledge of the takeover talks held in July, believe Glencore could have deliberately released the takeover rumours to the public. This would put pressure on Rio’s management to deliver on its goals in the near-term, or risk losing the support of shareholders.

However I wouldn’t buy Rio shares on speculation of the takeover going ahead. Indeed, I think risk-averse investors should look elsewhere for more suitable dividend stock ideas.

For example, our top analyst Scott Phillips, recently identified one cheap but growing small-cap ASX stock which has a 6.3% grossed-up dividend yield. I think it is a STANDOUT long-term buy at today’s prices. If you’re interested in knowing its name, just click on the link below, enter your email address and we’ll send you a FREE report on his top dividend stock idea for 2014 – 2015.

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Motley Fool Contributor Owen Raszkiewicz is long December 2017 $48 warrants in Rio Tinto. 

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