Dividend boom at Rio Tinto

What a difference a couple of years has made at Rio Tinto. Back in February 2016, the previous management team frustrated investors by ending the Anglo-Australian company's progressive dividend policy, arguing that it was not appropriate for cyclical industries such as mining.

The move followed a year in which miners were rocked by faltering Chinese demand and a drop in iron ore prices, with the company racking up a loss of $726 million (£522 million) and freezing its full-year dividend at 215 US cents a share.

From 2017 onwards, the plan has been to link the divi to profit. And it's turned out well for shareholders so far, having just seen Rio register a massive surplus of $8.6 billion on the back of surging commodity prices and a robust operating performance.

This has allowed Rio Tinto to unveil a record full-year dividend of 290 cents a share worth $5.2 billion, giving a yield of 5.3%. Included in today's bigger-than-expected award is a final dividend equivalent to 180 cents a share.

With the additional promise of a fresh share buyback worth $1 billion before the end of 2018, the total figure being returned to shareholders amounts to $7.2 billion or 83% of 2017 underlying earnings.

The "superior cash returns" on offer from Rio partly reflects the impact of initiatives started in 2016 by former boss Sam Walsh to cut $2 billion from costs over two years and to maintain tight control of capital expenditure.

Jean-Sébastien Jacques, who took over from Walsh in July 2016, said Rio's "strong balance sheet, world-class assets and disciplined allocation of capital" meant it was well placed to take advantage of current favourable conditions.

As a result, Rio's shares have more than doubled since early 2016, with UBS analysts thinking there's room for further growth to £40 and BMO Capital Markets believing the price could go as high as £44.

But not everyone is relaxed about the Rio story. Fund manager Neil Woodford has missed out on the share price gains because of his concerns that the rally in commodity prices is based too much on speculation and is not fully justified.

In a recent interview with FT Adviser, Woodford pointed to the example of iron ore trading in China, which on a daily basis regularly exceeds the country's entire annual output of that commodity.

He said fundamental demand for commodities in China is being driven by credit growth, with the economy needing to borrow five units of debt for every one extra unit of growth created.

UBS is also cautious on the near-term outlook on commodities, but still sees potential for further re-rating from a projected free cash flow yield of 8%, which is set to be enhanced by further disposals.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.