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Can Rio Tinto Outperform Vale?

Thursday - 1/3/2013, 4:45pm  ET

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100 (UKX), FTSE 250 and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at global mining giant Rio Tinto  and its Brazil-based peer Vale SA . All data is sourced from Morningstar, Reuters, and company reports.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, Rio Tinto, or Vale?


Rio Tinto


Current price-to-earnings ratio (P/E)



Forecast P/E



Price-to-book ratio (P/B)



Price-to-sales ratio (P/S)



There isn't a huge amount to divide Vale and Rio in terms of value. Vale's lower P/B ratio is attractive from a pure value point of view, as it provides the maximum amount of asset-backing for each share. However, Rio's lower P/S ratio is perhaps more relevant, as miners' assets tend to be hard to sell in times of need, meaning that their revenue streams (and profits) are often of more practical value when judging the appeal of a company.

Overall, I'd say that Rio Tinto and Vale are pretty much level on value, with Rio having a slight advantage.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Rio and Vale compare in terms of income?


Rio Tinto


Current dividend yield



5-year average historical yield



5-year dividend average growth rate



Forecast yield



Of these two, I would pick Rio Tinto for income. Vale's recent dividend history is checkered; it paid no dividends in 2010 but has declared two special dividends this year, boosting the total yield for 2012 to about 5%. However, special dividends are not a reliable source of yield, as by their nature they tend to be occasional, rather than regular. In most cases, I prefer to rely on regular dividends when considering a share's income potential.

Vale is also less diversified than Rio -- in 2011, iron ore accounted for a massive 88% of its EBITDA earnings, compared to 70% for Rio. Although both companies are heavily dependent on the global iron ore market, Rio earns more from other commodities and is likely to continue to do so. This diversity could help protect its dividend payments in the event of a downturn in the iron ore market.

Mining shares are not normally high-yielding shares, but they do provide a means of earning an income directly from major commodities such as iron ore and copper. This can be a good way of adding some diversity to your portfolio, as long as you remember that miners' dividends may come under pressure if the price of their main commodities falls.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Rio and Vale shape up in terms of growth?


Rio Tinto


5-year earnings-per-share growth rate



5-year revenue growth rate



5-year share price return



Vale looks to be a clear winner here with strong earnings growth over the last five years, while Rio's earnings have fallen. Revenue growth is similar for both companies and share price performance has been equally poor from both companies.

However, Vale's wholehearted commitment to iron ore means that it is even more dependent than Rio on the continued growth of the world steel industry -- which principally means China. This could work out well, but personally I prefer Rio's move toward greater diversification, especially its growing emphasis on copper -- it is just starting production at a giant new mine in Mongolia -- and its substantial aluminum business. This diversity should help Rio benefit from future demand growth for these two key materials, which could counterbalance changes in demand for iron ore.

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