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Is the Rio Tinto share price a buy?

Is the Rio Tinto Limited (ASX: RIO) share price a buy?

The resources giant has seen its share price fall by 13.5% since the start of July, does that mean its share price is a buy?

I’ve always said the best time to buy shares of a cyclical resource business is when they’re down. But since January 2016 the Rio Tinto share price is actually up by 137%, so it certainly hasn’t reached its former lows.

In the half year result Rio Tinto unveiled an 11% increas in underlying earnings before interest, tax, depreciation and amortisation (EBITDA), a 12% increase of underlying earnings, a 22% increase of net cash generated from operating activities and a 35% rise of free cash flow.

All of those above numbers resulted in Rio Tinto reporting that its underlying earnings per share (EPS) rose by 19% and that funded a 19% increase of the ordinary dividend.

What more could you want?

Well, a $5.1 billion increase of net debt to $4.9 billion to fund the ordinary dividend, special dividend and buy-back amounting to $7.8 billion may not have been a wonderful thing for the Rio Tinto balance sheet.

We’re near the top of the resources cycle, so I’d be hoping the company would be keeping a net cash position and leaving some powder dry for when the resources market inevitably turns.

However, the demand for returns by shareholders is strong, particularly in this low interest rate environment, so I understand why the dividends are flowing whilst times are good.

Rio Tinto’s dividend has been growing strongly since 2016 with iron ore doing well. But questions are now being raised about the strength of the Chinese economy. Is the trade war having more effect than people realise? Can the Chinese version of capitalism continue to work after many years of strong growth?

Foolish takeaway

Rio Tinto is trading at 10x FY20’s estimated earnings, but this is very dependent on what iron ore prices do. The current dividend looks attractive, but it is likely to fall if the resource price drops.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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