Royal Bank of Canada said it continues to like mining giant Rio Tinto PLC (LON:RIO), but that did not stop it from downgrading the stock.
The new rating is “outperform”, and the downgrade is more to do with the greater appeal of sector peers such as Anglo American PLC (LON:AAL), where there is “a larger valuation disconnect” and Glencore PLC (LON:GLEN), where there is “a dynamic growth story evolving”.
“Rio Tinto has succeeded (for the time being at least) in rebalancing its cash returns, balance sheet and growth needs, reinforcing its conservative and sound position. After the higher than expected cash return/buyback, we see increasing probability of persistent special dividends (this is pre- potential Coal and Allied H2 proceeds of $2.4bn),” RBC said, as it outlined some of the factors underpinning the investment case for Rio.
READ: Rio Tinto more than doubles dividend, launches US$1bn share buy-back as profits jump
“The total dividend yield of 8% should underpin investment demand and continue to see Rio Tinto attract investor interest going forward,” RBC predicted.
Chinese supply-side reforms and an increased environmental focus should benefit Rio’s iron ore and aluminium businesses, the Canadian bank believes, resulting in “another wave” of upgrades to earnings per share forecasts for 2018.
“However we do expect a slowing Chinese property market and concerns on growth to increase following the Communist Party leadership conference in November. This may weigh on sentiment, meaning an ‘iron ore’ fundamentals rerating pushed out to later in 2018,” RBC said.
Shares in Rio were down 0.9% at 3,383.5p in a rising market in late morning trade.