In the last six months Rio Tinto (LSE:RIO) the share price has fallen by 11%. Over a year it has fallen by 3%. Especially in the last few months the FTSE100 The stock has struggled to recover despite the positive performance of the overall index. Nevertheless, I’m considering adding more Rio Tinto shares to my portfolio. Here’s why.
The year so far
I first bought Rio Tinto shares at the beginning of the year because I thought metals and other commodities could outperform. That was true for most of the first part of the year. As a result, the stock performed well because the company mines products such as iron ore, copper and lithium. The more demand there is for these products, the higher the price you can charge for them.
This ultimately helps Rio Tinto’s revenues to grow and has a knock-on effect on its share price. However, there were some problems at the start of the summer.
Concerns about the lack of recovery in China have raised fears among some investors about the impact on Rio Tinto, as China is the largest consumer of key metals due to its construction sector.
Another problem arose in July when the Q2 report showed that iron ore production fell 2% compared to the same period last year. This was attributed to supply issues that can be resolved.
Why I am still optimistic
The stock is now back to Q1 levels, I think I’ll buy now if the price falls. Part of the reason has to do with valuation. The price-to-earnings ratio has fallen below 10, which is my fair value benchmark. It’s at 8.85, which to me indicates potential undervaluation.
The share price decline has also led to an increase in the dividend yield, which currently stands at 6.78%, well above the average yield of the FTSE 100. From my income perspective, this is a compelling buy.
Furthermore, my opinion on key commodities has not changed. When we talk about the hardware (like batteries) that goes into the development of artificial intelligence (AI) and electric vehicles (EVs), copper, lithium and more are needed. The commercial uses of these products are large and will only continue to grow, so I think Rio Tinto is well positioned to benefit from this.
The long-term perspective
Of course, I have to be patient here. The risk is that the persistent bad mood will weigh on the stock for the rest of the year. But that means I can sit back and relax in the meantime and be happy with the dividend income. In the long term, I expect the share price to rise again to a fairer value, driven by demand from China, AI and electric vehicles.
The post Why I’m buying more of this cheap FTSE 100 share even as it falls appeared first on The Motley Fool UK.
Further reading
Jon Smith owns shares in Rio Tinto. The Motley Fool UK does not own any of the shares mentioned. The views expressed in this article on the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
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