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Rio Tinto switches to 'flexible' dividend policy

The world's second-largest miner held firm on the 2015 final dividend, but the 2016 payout is set to drop
February 12, 2016

Workplace safety is important, of course, but Rio Tinto 's (RIO) decision to open its 2015 results with a graph showing falling injury rates wasn't the main detail investors were after. Unfortunately, Rio's progressive dividend policy did not emerge unscathed from a year in which the price of iron ore, Rio's core product, dropped to 80 per cent below its 2011 high.

IC TIP: Buy at 1662p

It could have been worse, though. Unlike fellow miners Glencore (GLEN) and Anglo American (AAL), Rio stopped short of cutting shareholder returns altogether, although the move to a more "flexible" dividend policy wiped 6 per cent off the company's shares in early trading. Chairman Jan du Plessis says that, in light of market uncertainty, the 2016 dividend should "not be less than" 110¢ a share, which represents a worst-case forward yield of 4.6 per cent.

Given the 34 per cent fall in net cash flow to $9.4bn, that seems like a prudent move, although share buybacks totalling $2bn in 2015 - partly funded from free cash flow - meant interest cover was reduced from 13 to seven times.

However, gearing remains in line with management targets and, despite being placed on negative credit watch by Standard & Poor's last week, Rio Tinto has hit the current tail-off in the commodities cycle with a lower debt profile than its dividend-cutting peers. Efforts to shore up its balance sheet are therefore concentrated on taking out a further $1bn in operating costs in 2016 and 2017, which together with capital expenditure cuts, removes an extra $5bn from the next two years' outlay.

Those cuts aren't going to fall on the planned iron ore mine in the Pilbara or the expansion of the Oyu Tolgoi copper mine in Mongolia, which increased production by an encouraging 36 per cent and contributed half a billion dollars of free cash flow. This helped to offset reduced output at the Kennecott mine, while lower grades at Escondida were balanced by higher throughput and recoveries from leaching.

JPMorgan expects earnings per share of 94¢ this year, falling to 41¢ in 2017.

RIO TINTO (RIO)

ORD PRICE:1,948pMARKET VALUE:£35.3bn
TOUCH:1,948-1,948p12-MONTH HIGH:3,280pLOW: 1,557p
DIVIDEND YIELD:7.7%PE RATIO:na
NET ASSET VALUE:2,077¢NET DEBT:31%

Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201160.5013.20304145
201251.00-2.40-163167
201351.203.50198192
201447.669.55353215
201534.83-0.73-47.5215
% change-27---

Ex-div: 25 Feb

Payment: 7 Apr

£1=$1.44. NAV and market value reflect both UK and Australian shares.