ASX Dilemma: Rio Tinto or Telstra Stock – Which One to Choose? - Kalkine Media

December 04, 2023 06:10 PM AEDT | By Team Kalkine Media
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Investors often find themselves torn between powerhouse ASX blue chip stocks, each presenting unique characteristics. In this analysis, we weigh the merits of Rio Tinto Ltd (ASX: RIO) and Telstra Group Ltd (ASX: TLS), exploring key factors such as returns, valuations, dividend yields, and growth prospects. 

Returns and Valuations 

Rio Tinto (ASX: RIO): 

  • Total shareholder return in the last three years: 12.3% 
  • Average return per annum over the past decade: 13.4% 
  • Valuation: 11x FY24's estimated earnings 

Telstra (ASX: TLS): 

  • Total shareholder return over the past three years: 13.1% 
  • Average return per annum over the past decade: 2.1% 
  • Valuation: 21x FY24's estimated earnings 

Dividend Yield 

  • Rio Tinto: Estimated annual dividend of $6.97 in FY24, grossed-up dividend yield of 8%. 
  • Telstra: Forecasted annual dividend per share of 18 cents in FY24, grossed-up dividend yield of 6.8%. 

Factors Driving Growth 

Rio Tinto: 

  • Diversification into decarbonisation commodities, focusing on copper and lithium. 
  • Reduced reliance on a single commodity (iron ore). 
  • Profit unpredictability due to fluctuating commodity prices. 

Telstra: 

  • Predictable growth with increasing subscriber numbers. 
  • Growing average revenue per user (ARPU) in line with CPI inflation. 
  • Cost reduction efforts to enhance profitability. 
  • Expansion opportunities with the rollout of the new 5G network. 

Investor's Dilemma 

While Rio Tinto appears attractive with a lower P/E ratio and a higher dividend yield, its profitability is more unpredictable due to commodity price fluctuations. The current strength in iron ore prices may not make it an optimal time to invest. 

Telstra, on the other hand, offers more predictable growth with a focus on increasing subscriber numbers and growing ARPU. The telco's efforts to reduce costs and the potential unlocked by the new 5G network make it an appealing choice for consistent profit and dividend growth. 

Conclusion: Telstra Takes the Lead 

In the head-to-head comparison, considering the long-term growth potential and more predictable earnings, Telstra emerges as the preferred choice. The telco's strategic initiatives and steady revenue streams position it favorably for consistent returns. While Rio Tinto's foray into decarbonisation commodities is promising, the uncertainties associated with resource prices make Telstra the more reliable option for sustained growth. 


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