ASX iron ore stocks are surging and could be heading higher. The question is whether the Rio Tinto Limited (ASX: RIO) share price or BHP Group Ltd (ASX: BHP) share price is the better buy?
Australia's largest listed iron ore producers have each surged between 4% and 5% in after lunch trade as they are likely to be upgraded by analysts.
A jump in the iron ore price after Brazilian rival Vale SA downgraded its 2020 and 2021 production guidance is driving these stocks higher.
The big rally among ASX iron ore miners is largely responsible for the 0.5% increase in the S&P/ASX 200 Index (Index:^AXJO) today.
BHP share price vs. Rio Tinto share price
The best way to gain exposure to this thematic is to buy a basket of ASX iron ore stocks. But if you can't or would just like to know which side you should stand on in the BHP share price versus Rio Tinto share price debate, Citigroup may have the answer.
The broker weighed up both stocks and believes that the Rio Tinto share price is the one to back. There are two key reasons for this.
"We compare BHP and RIO on a number of measures ranging from portfolio exposure, growth pipeline, strategic direction and potential shareholder returns," said Citi.
"We found more similarities than differences – though from here the strategic direction looks very different for both."
Rio wins in ESG ranking
The strategic difference here is Rio Tinto's exposure to aluminium and BHP's leverage to oil.
Citi believes that aluminium improves Rio Tinto's green credentials. This means the RIO share price will be more appealing from an Environmental, social and governance (ESG) perspective.
Investors are focusing more on ESG as compared to the past as the impact of global warming cannot be ignored. There's also a growing body of evidence that shows ASX stocks that score higher in ESG tend to perform better over the longer-term.
BHP share price influenced by oil
"BHP's green growth option is potash but mid-term growth is driven by oil and gas with additional price leverage to coking coal," explained the broker.
"Both will face increasing scrutiny around iron ore Scope 3 CO2 emissions."
Rio Tinto generates a higher yield
But there's also a more practical reason why Citi prefers the Rio Tinto share price. Citi pointed out that production growth for both miners are modest at best.
This is in part due to scale as these giants are so big that getting any meaningful increase in production is more difficult.
Also, Citi noted that BHP's and Rio Tinto's more recent efforts to increase production have been wanting.
This is why it may be more appropriate to view these stocks are income instead of growth.
"[The] near term dividend/capital management capacity favours RIO with a CY21 dividend yield of ~8% versus BHP at ~6%," added Citi.
