Is Now the Time to Buy Rio Tinto?

LONDON --�I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Rio Tinto (LSE: RIO  ) (NYSE: RIO  ) to determine whether you should consider buying the shares at 3,300 pence.

I am assessing each company on several ratios:

• Price/Earnings (P/E): Does the share look good value when compared against its competitors?
• Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
• Yield: Does the share provide a solid income for investors?
• Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock	Price	3-yr EPS growth	Projected P/E	PEG	Yield	3-year dividend growth	Dividend cover
Rio Tinto	3,300 pence	126%	10	N/A	3.1%	220%	6

The consensus analyst estimate for next year's earnings per share is $5.20 (down 55%) and dividend per share is $1.60 (up 10%).

Trading on a projected P/E of 10, Rio Tinto appears significantly more expensive than its peers in the Mining sector, who are currently trading on an average P/E of around 6. Unfortunately, Rio Tinto's relatively high P/E and negative growth rate give me a negative PEG ratio, which cannot help with my analysis.

Offering a 3.1% yield, the dividend is about average for the sector, with the mining sector as a whole yielding just above 3%. However, Rio Tinto has a three-year compounded dividend growth rate of 220%, although this figure is skewed -- similar to most miners at the time, Rio had to chop its dividend payout during the banking crash.

Anyway, the dividend is just under six times covered, giving Rio plenty room for further payout growth.

Strong historic growth -- what about the future?
Rio Tinto has seen strong historic growth, but this growth is now coming under pressure as falling commodity prices impact revenues. However, the company is taking action to offset falling prices.

Rio Tinto is targeting $5 billion of cost cuts by the end of 2014. The company is also reducing exploration spending by $1 billion over the remainder of 2012 and throughout 2013. I can see Rio is working on improving productivity as well -- indeed, trucks with no drivers have been introduced at some operations and there are plans to run a fully automated train service across the company's Australian iron ore network, which should help boost output by 60%.

Rio Tinto is also focusing on streamlining its business, having completed the sale of several non-core businesses this year. That said, group net debt has increased an alarming 55% this year to $13.2 billion, up from $8.5 billion in 2011.

Reading through Rio Tinto's latest trading statement, management states it has "guarded optimism" over the global economy and China. Although I still have doubts about the global economy, I believe Rio is taking steps to strengthen its business for the future. Despite these steps, I think the company' shares appear expensive right now, both within the sector and for the near-term growth it is expected to produce.

So overall, I believe now does not look to be a good time to buy Rio Tinto at 3,300 pence.

More FTSE opportunities
As well as Rio Tinto, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor." This exclusive report reveals the favourite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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