Rio Tinto shares are a screaming buy. Here’s why

The UK’s blue-chip FTSE 100 index is currently worth around £2.03trn. Yet this index is dominated by 10 super-heavyweight members, each worth more than £60bn. In total, these mega-cap stocks are worth over £1.01trn, or almost half (49.9%) of the index. And big player Rio Tinto‘s (LSE: RIO) shares caught my eye today.

Mega-miner

For the record, my wife bought Rio Tinto shares last June for our family portfolio, paying an all-in price of 5,204p a share.

Seven months later, shares in the Anglo-Australian mega-miner had taken off, hitting a 52-week high of 6,406p on 26 January. At this point, we were sitting on a paper gain of almost a quarter (+23%).

However, since hitting its 2023 high, the Rio Tinto share price has taken a beating. As I write on Friday afternoon, it stands at 5,118p, down 324p (-6%) today.

This makes this popular stock the worst performer in the FTSE 350 index today. Also, it values Rio Tinto at £86.9bn, making it the seventh-largest business in the FTSE 100.

Here’s how the Anglo-Australian miner’s shares have performed over six different periods:

My table clearly shows how Rio Tinto stock has lost ground lately, falling over one week, one month, and in 2023 so far. However, it is up almost three-tenths over five years. Note that the above returns exclude cash dividends — highly important for Rio shareholders, as I explain below.

Rio Tinto shares look undervalued to me

So far, Rio’s share price has dived more than a fifth (-20.1%) from its late-January peak. To me, this indicates that the shares may be due an uplift sometime soon.

But Rio’s profits may take a hit this year from lower demand for base metals from global workshop China. Also, in a first-quarter trading update on Thursday, the group warned of lower copper output due to productions issues at major mines in the US and Chile.

Despite these concerns, I’m convinced that Rio Tinto shares are, quite simply, far too cheap. They trade on a price-to-earnings ratio of 8.4, for an earnings yield of 12%. That yield is 1.5 times the FTSE 100’s 8% a year.

What’s more, after sustained price falls, this stock offers a dividend yield of 8%, covered 1.5 times by earnings. If this dividend were to be maintained in 2023/24, it would be among the Footsie’s very highest.

Lastly, long experience has taught me that owning mining stocks can be a rough ride. Also, even the mega-miners have a reputation for slashing dividends during commodity downturns. Rio Tinto last cut its dividend in 2016, while analysts have forecasted lower dividends this year.

Even so, I’d gladly buy more Rio Tinto stock today — if I had enough spare cash, that is!