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Rio Tinto’s $4bn special delivery

The diversified miner announced a monster special dividend with its full-year results
February 27, 2019

Four billion dollars. That’s the value of the special dividend that will accompany Rio Tinto’s (RIO) normal distribution when it is paid on 18 April. For context, this $2.43 (£1.84)-a-share bonus would have alone set an annual dividend record for the goup until 2016. Since that year, announced capital returns, including dividends and buy-backs, have reached $29bn, more than the total capital allocated to reducing net debt ($14bn), sustaining operations ($6bn) and growth projects ($7bn).

IC TIP: Hold at 4,450p

The diversified miner has been able to do this by selling assets. Consequently, shareholders are better served by the preliminary results’ underlying numbers rather than the disposal-inflated reported figures. On this score, earnings rose just 2 per cent to $8.8bn in the period, while a trimmed portfolio resulted in a 27 per cent decline in free cash flow.

Still, the underlying return on capital employed stayed strong at 19 per cent, thanks in large part to the star iron ore division, where margins held up and operating cash flow only dipped 2 per cent to $8.3bn, despite a 3 per cent fall in average prices. The picture was inverted within the aluminium business, where a sharp uptick in cash costs and a dip in output offset rising commodity prices to cut cash profits by 10 per cent, to $3.1bn.

Margins were hit even harder within the minerals division, where mining issues hampered both the titanium dioxide and Canadian iron ore pellet segment. Expectations that output from the latter will rebound in 2019 could theoretically help Rio’s unconfirmed plans to sell or list the business.

These results were accompanied by news of a discovery of a copper-gold mineralisation at the Winu project in Western Australia, and a report outlining the miner’s response to climate change. Odd as it may sound, the second of these offers more encouragement. Though the house of Rio Tinto was built on fossil fuels, its future is increasingly mapped to a world of rising political and investor pressure on greenhouse gas emissions – as investments in high-grade iron ore, copper and carbon-free aluminium smelting technology show.

Consensus forecasts are for earnings of $5.12 per share this year, up from $4.98 in 2018.

RIO TINTO (RIO)   
ORD PRICE:4,450pMARKET VALUE:£73.9bn^
TOUCH:4,449-4,454p12-MONTH HIGH:4,541pLOW: 3,460p
DIVIDEND YIELD:5.2%*PE RATIO:7
NET ASSET VALUE:2,662¢^NET CASH:$0.3bn
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend share (¢)
201447.79.55353215
201534.8-0.73-47.5215
201633.86.34257170
201740.012.8490290
201840.518.2793307*
% change+1+42+62+6
Ex-div:07 Mar   
Payment:18 Apr   
£1=$1.33. *Excludes 243¢ special, payable with the final. ^Includes UK and Australia-listed shares.