Interactive Investor

Rio Tinto halves dividend

11th February 2016 13:25

Lee Wild from interactive investor

It was both inevitable and sensible. The only surprise about Rio Tinto's decision to halve the dividend for 2016 is that it took so long to decide. A plunge into the red last year, amid plummeting iron ore and copper prices, guaranteed the heavyweight miner would tweak its payout policy. BHP is tipped to follow suit. Rio's share price, however, remains within striking distance of a new seven-year low.

Rio lost $866 million (£601 million) after tax in 2015, compared with a $6.5 billion profit the year before. A near-$13 billion slump in revenue on weak commodity prices didn't help.

Neither did a $1.8 billion writedown at the Simandou project in Guinea, and an additional $1.4 billion of foreign exchange losses on US dollar debt. Net debt was $13.8 billion.

Given those numbers, keeping the dividend for 2015 unchanged at 215 US cents is the best shareholders could hope for, and chairman Jan du Plessis admitted a "more flexible approach" was needed, so that shareholder returns better reflected "the company's position and outlook".

Next year, the dividend will be "not be less than" 110 cents a share, or $2 billion, which still gives a prospective yield of 4.5% at today's prices.

"The board expects total cash returns to shareholders over the longer term to be in a range of 40-60% of underlying earnings in aggregate through the cycle," reads the new dividend policy. Underlying earnings halved last year to $4.5 billion.

It's why chief executive Sam Walsh - who's overseen most of the $6.2 billion of cost cuts since 2012 - is keen to crank up the cost-saving programme and slash spending plans further.

"The continued deterioration in the macro environment has generated widespread market uncertainty. We are embarking on a new round of proactive measures to cut our operating costs by a further $1 billion in 2016 followed by an additional goal of $1 billion in 2017," he said.

"We are also reducing our capital expenditure to $4 billion in 2016 and $5 billion in 2017, an overall reduction of $3 billion compared with our previous guidance."

So, what next?

Investec Securities like Rio, "the most robust of the diversifieds and current actions, in our view, will ensure that it remains so". The broker's forecasts are under review, but expect changes as it factors in today's news.

Earlier this month, it pointed out that in just one year, consensus estimates had reduced the net present value (NPV) of Rio's assets - "the most robust measure of value," according to Investec - by around $40 billion, or 1,530p per share.

It still thinks the shares are a 'buy'.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.