Schroptschop/E+ via Getty Images

Schroptschop/E+ via Getty Images

Investment thesis: this is attractive stock from a macroeconomic, income statement, and technical perspective.

Rio Tinto (NYSE:RIO ) is in the basic materials sector:

Rio Tinto Group engages in exploring, mining, and processing mineral resources worldwide. The company offers aluminum, copper, diamonds, gold, borates, titanium dioxide, salt, iron ore, and uranium. It also owns and operates open pit and underground mines, mills, refineries, smelters, power stations, and research and service facilities. The company was founded in 1873 and is headquartered in London, the United Kingdom.

It is the third largest company in the "other industrial metals" sectors.

I'm still a bit amazed when a company the size of RIO winds up on one of my momentum screens. It just seems a bit out of place due to its size and market dominance. But when I noticed that the company is yielding 9.42%, I realized that even with limited upside potential, the company is very attractive in a low-rate investment environment.

Several weeks ago, I wrote an article on the XLB, which included an analysis of the macroeconomic backdrop for the raw materials sector. The article noted that:

This analysis also applies to RIO, which means the macroeconomic backdrop is bullish.

Whenever I look at a large company like RIO, I treat the analysis more like a bond than a stock. What I'm looking for is safety. The following tables are derived from the company's balance sheet along with the revenue and cash flow statement. All are available from the Seeking Alpha RIO page.

RIO debt/asset ratio Seeking Alpha

The above table divides total debt by total assets to arrive at the debt/asset ratio which is very low.

RIO Interest and Dividend Payments Seeking Alpha

RIO Interest and Dividend Payments

The above data is compiled from the company's income and cash flow statement. I've totaled the cash from operations after subtracting investment expenses (third row). I've then added total interest and dividend payments (row second from the bottom) and subtracted them from operating-investment total on the third row. The bottom row shows that the company has ample cash flow to make both interest and dividend payments.

The basic materials sector is leading the SPY.

RIO is strengthening relative to the SPY.

6-Month chart of RIO with the RIO/SPY ratio (top panel); MACD (1st panel below price); Price Percentage Oscillator (2nd panel below price): Chaikin Money Flow (3rd panel below price). From StockCharts.

Let's start with the momentum indicators in the bottom panels. Both the MACD and PPO are rising and have been since late November. The CMF could be a bit better, but it's been positive most of the time since late October. The RIO/SPY ratio (top panel) shows that RIO has been edging higher relative to the SPY since mid-November and recently popped higher. Prices recently broke through the 200-day EMA on a strong volume surge.

What we have here is the best of both worlds: a company with a stunningly high dividend that that is safe. Assuming the stock stalled at current levels for the next year, the investor would still have a return of over 9% -- not bad for stodgy natural resources company. But the stock is also moving sharply higher and is positioned to outperform the SPY in the short term, adding the potential for some capital appreciation into the equation.

What's not to like about this combination?

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.