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Rio Tinto cuts payout amid "challenging environment"

Interim dividend is second-highest ever but payout ratio is well below expectations at 50 per cent of free cash flow
July 27, 2022
  • Cash profits down after iron ore prices came back from historic highs
  • Management underlines "discipline" and long-term metals demand drivers

The music is off and the lights are on for the mining sector’s most recent bull market party. In Rio Tinto’s (RIO) interim results, covering the six months to 30 June, profits were down on the record levels of last year while the interim dividend missed analyst expectations. 

Lower commodity prices and volumes in some segments contributed to the earnings drop, while higher costs also ate into margins. 

Underlying Ebitda for the period was $15.6bn (£12.9bn), 2 per cent behind consensus forecasts and a quarter down on last year. Iron ore and copper prices were largely responsible for this drop, with the price difference in iron knocking $5.7bn of cash profit off the balance sheet. This was partly balanced out by a strong uptick in the aluminium price. 

Chief executive Jakob Stausholm said current conditions were tough but picked out lower inflation in China compared with other parts of the world and longer-term trends of urbanisation and the energy transition as reasons to be optimistic. 

Even with the high-inflation landscape, management’s decision to shift the dividend payout to 50 per cent of free cash flow from 60 per cent or more, as seen last year, was a surprise.

“Clearly the economic outlook appears to be challenged, but [the payout ratio] is divergent with the underlying free cash flow beat in the half with lower capital expenditure,” said RBC Capital Markets analyst Tyler Broda. 

This profit level is still high compared with long-term trends and there is still plenty of free cash flow to pay out to shareholders, even if it’s proportionally lower than last year. That said, headaches around expansion projects Oyu Tolgoi in Mongolia, Simandou in Guinea and Jadar in Serbia, keep us neutral on this miner. Hold. 

Last IC View: Hold, 4,691p, 20 Jul 2022

RIO TINTO (RIO)    
ORD PRICE:4,659pMARKET VALUE:£ 60.8bn
TOUCH:4,659-4,660p12-MONTH HIGH:6,343pLOW: 4,354p
DIVIDEND YIELD:12.3%PE RATIO:5
NET ASSET VALUE:3,101ȼNET DEBT:4%
Half-year to 30 JuneTurnover ($bn)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)
202133.118.0761367
202229.812.3550267
% change-10-32-28-27
Ex-div:11 Aug   
Payment:22 Sep   
£1=$1.21 NB: 2021 HY dividend yield excludes special dividend of 185¢