LONDON — After making strong gains toward the end of last year, shares in miners Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton plc (ADR) (NYSE:BBL) have fallen by around 10% since the beginning of 2013.
The falls have been caused by institutional shareholders trimming their holdings in each company — but I believe this is a great opportunity to buy into these two world-class companies at very attractive prices.
Rio Tinto vs. BHP Billiton
‘m going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their last published results:
| Value | Rio Tinto | BHP Billiton |
|---|---|---|
| 2012 revenue | £33,529 | £44,043 |
| P/E ratio | 9.5 | 11.9 |
| Dividend yield | 3.5% | 3.9% |
| Net gearing | 41% | 45% |
Both Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton plc (ADR) (NYSE:BBL) made paper losses last year, after writing down the value of several major assets. The P/E ratios I’ve included in the table above are based on underlying earnings, which I think provides a more realistic view of each company’s performance.
The income available from both companies is also attractive — both dividend yields are above the FTSE 100 average of 3.2%, making them worth considering for a diversified portfolio of income shares.
I expect Rio Tinto plc (ADR) (NYSE:RIO)’s and BHP Billiton plc (ADR) (NYSE:BBL)’s dividends to continue to grow over the next few years, as both companies have said they will cut back capital expenditure on new projects, and focus on maximizing their profitability and enhancing shareholder returns.
What’s next?
Analysts’ forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.
With that in mind, let’s take a look at the forecasts for Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton plc (ADR) (NYSE:BBL). These apply to the companies’ current financial years, which end in June (BHP) and December (Rio):
| Rio Tinto | BHP Billiton | |
|---|---|---|
| Forecast P/E ratio | 7.2 | 11.3 |
| Forecast dividend yield | 3.7% | 4% |
| Forecast dividend growth | 6.3% | 5.2% |
| Forecast earnings growth | 26% | (32.0)% |
These figures, which are based on the companies’ guidance figures and analysts’ forecasts, suggest that Rio may be nearer the end of its consolidation phase than BHP Billiton plc (ADR) (NYSE:BBL), which is expected to deliver another year of disappointing earnings.
It’s worth taking a brief look at the main commodities produced by each company. Around 75% of Rio Tinto plc (ADR) (NYSE:RIO)’s earnings come from iron ore, while the remainder is split between aluminum, copper and coal.
In BHP’s case, around 50% of earnings from iron ore, while around 25% comes from oil and gas production, mostly in the U.S. The remainder comes mostly from copper, aluminum and coal.
Which share should I buy?
BHP Billiton plc (ADR) (NYSE:BBL)’s major commitment to oil and gas is something to consider if you want a diversified portfolio, as it could take you overweight on oil if you also hold shares in a supermajor like BP or Royal Dutch Shell plc (ADR) (NYSE:RDS.A).
On the other hand, BHP does offer exposure to all the major industrial commodities in one share, which may be attractive, depending on your requirements.
I prefer Rio’s focus on mining, rather than petroleum, and I like its growing emphasis on copper. For all of these reasons, Rio is my pick as a buy — but I believe that both companies represent good value for money and provide an attractive way of earning an income from commodities.
2013’s top income stock?
Despite the attractive incomes offered by Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton, the U.K. utility sector remains one of the best places to find reliable, high-yielding income stocks.
The Motley Fool’s top analysts have looked closely at all of the listed U.K. utility companies and identified one FTSE 100 utility share which offers a 5.7% dividend yield, and which they believe may be undervalued by up to 20%.
The article Should I Buy Rio Tinto or BHP Billiton? originally appeared on Fool.com and is written by Roland Head.
Roland Head owns shares in Rio Tinto, BP, and Royal Dutch Shell. The Motley Fool has no position in any of the stocks mentioned.
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