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Why are these FTSE 100 shares so incredibly cheap?

Young female business analyst looking at a graph chart while working from home
Young female business analyst looking at a graph chart while working from home

From late June to late July, my wife and I created a new mini-portfolio of shares to widen our family portfolio. (I call it a mini-portfolio purely because it’s much smaller than our other holdings). This portfolio includes six FTSE 100 shares, three FTSE 250 shares, and one US stock.

I love buying cheap FTSE 100 shares

After 35 years as an investor, I stick to what I know: buying shares in large, quality companies at reasonable prices. I aim to buy into businesses with strong cash flow, earnings, and dividends, as these usually end up in the hands of shareholders — one way or another.

And that’s why FTSE 100 shares are my happy hunting ground for deep value and big dividends. However, this strategy — as with any other — sometimes goes awry. Here is one cheap stock we bought in the summer that has since fallen in value.

Is Rio Tinto the cheapest of FTSE 100 shares?

Rio Tinto (LSE: RIO) is an Anglo-Australian mega-miner with listings in London and Sydney. One of the world’s biggest mining corporations, Rio Tinto has a market value of £76.2bn. This ranks it eighth among the largest FTSE 100 shares.

Rio Tinto stock has taken several hard knocks since early June. This mega-cap share has dived 18.3% over the past six months. However, it is down just 5.2% this calendar year and is actually up 3.4% over the past 12 months.

Alas, Rio shares have crashed over 1,700p — more than a quarter (-26.9%) — since their 2022 peak of 6,343p on 3 March. Unfortunately, we bought into this FTSE 100 giant too early, purchasing shares at an all-in price of 5,203.7p a share in late June. Based on the current share price of 4,636.5p, this leaves us nursing a loss of 10.9%. Hardly ideal, but not worth shedding tears over.

Rio looks like a bargain to me

As a leading producer of base metals such as aluminium, copper, iron ore, and zinc, Rio Tinto is a key supplier to high-growth countries, particularly China (often described as the world’s workshop). But thanks to an ongoing property crisis and zero-Covid lockdowns, China’s economic growth is slowing.

Of course, as growth slows among major countries and companies, demand for raw materials will also decline. This could be bad news for Rio Tinto’s cash flow, earnings, and dividends in 2023. Even so, this share looks remarkably cheap to me today.

At the current price, shares in this global Goliath trade on a lowly price-to-earnings ratio of under 4.9 and a hefty earnings yield of 20.5%. Indeed, Rio Tinto’s earnings yield is almost triple that of the wider FTSE 100 index.

Likewise, this cheap share offers a whopping dividend yield of 11.5% a year, covered 1.8 times by earnings. This cash yield is nearly 2.8 times the FTSE 100’s yearly dividend yield of 4.1%. But Rio last cut its dividend in 2016 and could do so again.

To sum up, I view this FTSE 100 share as incredibly cheap at the moment. For me, Rio Tinto is a potential ‘double play’ — a dividend dynamo with scope for capital gains when economies (and metal prices) recover. Indeed, I’d happily buy more shares, if my wife agrees!

The post Why are these FTSE 100 shares so incredibly cheap? appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Rio Tinto shares. 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 2022