I’m extremely happy to keep giving Rio Tinto (LSE: RIO) a wide berth on Friday the 13th. This is despite dirt-cheap earnings multiples and corresponding dividend yields that smash the 4.8% FTSE 100 forward average.
Iron ore prices have dropped in recent months amid signs of worsening economic conditions in China, and if official projections are anything to go by, we could see the demand for the steelmaking ingredient retrace sharply in 2020.
According to the China Metallurgical Industry Planning and Research Institute, the country’s steel output will fall to 981m tonnes next year from a projected 988m tonnes in 2019, prompted by an expected 0.6% fall in steel off-take to 881m tonnes. Demand from shipbuilding is expected to plummet 11.5% year-on-year, whilst drops are also predicted from the critical auto and construction industries (by 3.6% and 0.6% respectively).
No wonder, then, that City analysts are expecting Rio Tinto’s earnings to sink 13% in 2020. And given that key economic indicators across the globe are continuing to worsen, and supplies from key iron ore producers like Vale, BHP Group and Rio Tinto itself are at the same time heading northwards, it’s possible that another painful reversal will be reported in 2021. For these reasons, I’m ignoring the Footsie firm despite its low P/E ratio of 10.3 times for next year and sky high 6.1% dividend yield.
Stay out of Town
Town Centre Securities (LSE: TOWN) is another big yielder I think market-makers should desperately avoid on Friday the 13th.
The share price has taken a heck of a whack in recent weeks following M&G’s decision to suspend its Property Portfolio fund, a consequence of high redemptions as investors panicked over the health of the retail property market. However, Town Centre Securities still trades on a slightly-toppy forward P/E multiple of 18 times, and given just how dire retail conditions remain in the UK, this leaves plenty of scope for more weakness in the weeks ahead.
This FTSE 250 firm saw EPRA profit drop 8% in the 12 months to June, a reflection of rising numbers of retailers filing for CVAs. And data shows that the number of shops encountering severe financial distress has worsened since then too, causing me to worry what Town Centre Securities’ next set of trading numbers will look like when the half-year report is unpacked in February.
City brokers currently expect earnings to edge 1% lower in the full year to June 2020, though I fear that some significant downgrades could be around the corner given the slump that the high street finds itself in. Latest British Retail Consortium data showed total retail sales in the UK dropped 4.4% between October 27 and November 23.
This makes me fear that broker projections of another 11.75p per share full-year dividend, and consequently a 5.4% yield, are in jeopardy too, given that earnings per share in fiscal 2020 are expected to come in at around the same level. I think Town Centre Securities should be avoided like the plague as there are plenty of other superior income bets to buy today.
