According to my research, the best easy-access Cash ISA on the market at the moment offers investors an interest rate of just 1.35%. This pitifully low rate of return does not even cover inflation. As a result, I think investors should go for high-yielding FTSE 100 dividend stocks instead.
A company that stands out to me right now is Rio Tinto (LSE: RIO). One of the largest mining companies in the world, Rio is extremely good at what it does.
The miner is the world’s largest pureplay iron ore producer, but it also produces several in-demand commodities such as lithium, a core component of batteries used in renewable energy storage and electric vehicles.
Fat profit margins
Rio’s scale, and the fact that it owns some of the most productive iron ore mines in the world, enables the company to generate impressive profit margins. Its Pilbara iron ore operations, for example, yielded an EBITDA margin of 72% during the first half of the group’s 2019 financial year, thanks to a combination of low operating costs and rising iron ore prices.
Overall, for the six months to the end of June 2019, Rio reported $10.3bn of EBITDA with an EBITDA margin of 42%. Return on capital employed, a measure of profitability for every $1 invested in the business, hit a record 23%.
What is even more impressive, in my opinion, is Rio’s is cash generation. The company reported free cash flow from operations of $3.9bn in the first half of 2019, which allowed management to announce cash returns of $7.8bn to shareholders.
Management also announced a 19% increase in the ordinary dividend for the second half of the year to $1.51. Including this, City analysts believe Rio will distribute a total of $4.50 per share in dividends to investors for 2019, giving a dividend yield of 7.5% on the current share price.
A step back
Unfortunately, analysts do not currently expect the stock to repeat this performance in 2020. However, they are forecasting a total distribution for the year of $3.60, giving a dividend yield of 6% on the current share price.
Considering Rio’s extremely healthy profit margins and strong balance sheet, (the firm reported a net gearing ratio of around 12% at the end of June 2019) I’m optimistic that the company will hit this target. In fact, I think there’s a good chance Rio could actually surpass it, considering the trajectory of iron ore prices over the past six months.
In November 2019, iron ore was valued at approximately $90 per dry metric tonne unit, as compared to around $73.30 in November 2018, and steel producers are forecasting increased demand over the next 12 months as global economic activity picks up and uncertainty declines. It costs Rio about $20 to produce a tonne of iron ore.
Thanks to its low operating margins, rising iron ore prices will benefit Rio more than other producers, suggesting that 2020 could be another year of growth for the company. Right now you can buy this opportunity for just 10 times forward earnings, a price that I think seriously undervalues the firm considering its growth and income potential.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020