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5-star investment idea
The UK Value Investor newsletter uses a unique rating system to combine a company’s growth, income and valuation. 5-star shares typically have higher growth, higher yields and lower PE ratios than the market average.
Rio Tinto (RIO 3,080p) is the FTSE 100, world leading mining company. Although Rio appears to be an attractively priced world leading company, there are a couple of caveats for investors. The first is that the shares can be very volatile. In 2008 the price went from over 5,000p to under 1,000p in a few months. Of course since the low point the share price has tripled, but these remain relatively volatile shares. The second point is that most of the reason why Rio gets a 5-star rating is that it has a very high growth rate. Growth is the least reliable indicator of future value, so make sure your research is thorough.
- Valuation- The current adjusted PE is around 6, while the price to 10 year earnings average is 14, both of which are cheap for a high growth company.
- Growth– Rio has grown earnings and dividends over the years, although sometimes there is a big gap between basic and adjusted earnings. The growth rate has been around 20% a year, well above the FTSE 100s rate of around 5%.
- Income- The yield at current prices is just below 3%. Although this is below the FTSE 100s yield of 3.6%, but Rio is generally expected to grow its dividend as a faster rate.
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Rolls Royce – Are the shares as attractive as the company?
Rolls Royce is a huge multinational producer of power plants. It’s a very steady company with a long history of profit, growth and dividends, but is it worth looking at with the shares around 830p?
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How to make money in value stocks
This free e-book comes courtesy of Stockopedia. It’s a good overview of many aspects of value investing and will give beginners an idea of the value investing landscape. You'll need to scroll down the page and enter an email to get the book.
Thanks for reading and see you next week,
John Kingham
Editor, UK Value Investor
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