Better ASX buy: Rio Tinto or Telstra stock?

Both of these blue-chip companies are stalwarts of their industries.

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There are some very strong ASX blue chips around to consider, such as Rio Tinto Ltd (ASX: RIO) and Telstra Group Ltd (ASX: TLS). In this article, I'm looking at which one I'd prefer to buy.

The mining and telecommunications sectors are very different. Demand for an internet connection is reliable and consistent, while miners go through significant shifts in supply and demand. That doesn't mean one is better than the other, but it is worthwhile acknowledging the differences.

Returns and valuations

Past performance is no guarantee of future returns with Rio Tinto stock, but at this moment in time, the mining giant has done well. According to CMC Markets, the total shareholder return in the last three years has averaged 12.3%. In the past decade, the average return per annum has been 13.4%.

Telstra stock has also delivered good returns in the medium term. Its total shareholder return was an average of 13.1% over the past three years and 2.1% per annum over the past decade.

According to the projection on Commsec, the Telstra share price is valued at 21x FY24's estimated earnings and the Rio Tinto share price is valued at 11x FY24's estimated earnings.

Dividend yield

Plenty of investors may be looking at these two ASX blue chip stocks for passive income.

Both of these businesses have a long history of paying good dividends. Let's look at what they may pay in the 2024 financial year.

In FY24, the estimate on Commsec suggests owners of Rio Tinto stock may get an annual dividend of $6.97, translating into a grossed-up dividend yield of 8%.

In FY24, Telstra is forecast to pay an annual dividend per share of 18 cents, this would be a grossed-up dividend yield of 6.8%.

What could drive growth?

On the surface, it seems like Rio Tinto stock is more attractive because it's on a lower price/earnings (P/E) ratio and has a higher dividend yield.

But, its profit is more unpredictable because of how commodity prices can change. The iron ore price has jumped to above US$130 per tonne, which boosts investor confidence and potential profitability for now.

I like that Rio Tinto is investing in decarbonisation commodities – namely copper and lithium. I think this reduces the company's reliance on one commodity (iron ore) and means less reliance on Chinese buying.

It's very hard to predict how much profit the lithium and copper segments are going to make for Rio Tinto because of the unpredictability of those resource prices.

Telstra's growth is more predictable – it's increasing subscriber numbers thanks to population growth and more international visitors. The average revenue per user (ARPU) is also growing as it increases mobile prices in line with CPI inflation. This makes Telstra stock appealing to me.

The ASX telco share is aiming to reduce its costs, which can help profit. While inflation is making reducing costs harder, it is helping on the revenue side of things.

Which ASX blue chip I'd choose

I like the direction Rio Tinto is going with its growth in copper – I believe this commodity has a very promising future because of the electrification of the world.

However, I don't think it's the right time to invest in an ASX iron ore share when the iron ore price is so strong – remember, it's above US$130 per tonne.

Over the long term, I believe Telstra can grow its profit and dividend more consistently, which can help Telstra stock returns, so it'd be my pick. The new 5G network may also help unlock new services and earnings for the telco.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. 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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