My Rio Tinto shares are soaring, but are still cheap!

Over the past seven months, my husband and I have been building a new stock portfolio. Our primary goal is to generate extra dividend income, but this pot also includes some growth stocks. And one of the early winners so far is us Rio Tinto (LSE: RIO) shares.

A rough ride for Rio Tinto stock

At the end of June, my husband bought Rio Tinto shares for 5,204p. At first, the stock price drifted sideways, but it fell during the October market weakness.

By October 31, it was a terrifying Halloween for Rio Tinto shareholders, with the share price diving to a 52-week low of 4,424.5p. At this point, our stock has generated a paper loss of 15%. But I keep my faith in the Anglo-Australian mega-miner. I even asked my husband to buy more shares. He politely declined.

The stock price rebounded

Exactly three months since Rio Tinto shares hit rock bottom, they have bounced back. As I write on Tuesday evening, the share price is at 6,280p, up 41.9% from the Halloween low. This resurgence took the stock more than five times (+20.7%) above the purchase price. Phew.

Here is how this stock has performed over various time periods:

For the record, Rio Tinto’s stock has easily beaten the bulk FTSE 100 index over six months, one year, and five years. Over the past half-decade, Rio has risen by more than three-fifths, while Footsie has gained just 4.2%.

Additionally, the figure does not include dividends, which would have boosted Rio’s performance. In short, it is a good stock to own since 2016 (at the bottom of the previous commodity price cycle). But what about future returns and dividends?

Rio Tinto still looks cheap to me

With a current market capitalization of £105.3bn, Rio Tinto is a FTSE 100 super-heavyweight. And shares just hit a 52-week high of 6,406p on 26 January. Having come so far, so fast, are these mining stocks too expensive right now?

Based on fundamentals, I think Rio Tinto shares are still cheap. It trades at a price-to-earnings ratio of 7.1, roughly half the earnings multiple of the FTSE 100. This translates into a market-beating earnings yield of 14% – one of the highest in London.

In addition, Rio’s dividend yield of 8.4% is one of the fattest in the world FTSE 350 index. Moreover, it is almost 1.7 times covered by earnings, which is a good margin of safety. And it is this generous and well-guaranteed cash flow that led us to buy this stock in the first place.

Finally, experience has taught me that mining stocks can be very volatile – something I have witnessed first hand over the past seven months. And Rio Tinto last cut its dividend in 2016, so it has some form in this regard. But we like to hold this dividend stock for its long-term potential!