Interactive Investor

ii view: Rio Tinto's record profit bankrolls massive dividend

Exposure to Chinese economic growth and a double-digit dividend yield. Buy, sell, or hold?

23rd February 2022 11:39

Keith Bowman from interactive investor

Exposure to Chinese economic growth and a double-digit dividend yield. Buy, sell, or hold?

Full-year results to 31 December

  • Sales revenue up 42% to $63.5 billion
  • Profit after tax attributable to shareholders up 116% to $21.09 billion
  • Final ordinary dividend of 417 US cents per share
  • Special dividend of 62 US cents per share
  • Total dividend for the full year, including specials, up 87% to 1,040 US cents per share

Guidance:

  • Full year 2022 production estimates remain unchanged

Chief executive Jakob Stausholm said:

“The recovery of the global economy, driven by industrial production, resulted in significant price strength for our major commodities, which we were able to capture, achieving record financial results.

“Our actions will ensure we continue to deliver attractive returns to shareholders, invest in sustaining and growing our portfolio, and make a broader contribution to society, particularly in relation to the drive to net-zero carbon emissions."

ii round-up:

Mining giant Rio Tinto (LSE:RIO) today posted both record profit and a record dividend as commodity prices surged higher over the year. 

A two-fifths increase in sales year-over-year to $63.5 billion helped adjusted profits more than double to over $21 billion, enabling a record total payout in dividends of $16.8 billion. The annual results, which broadly matched City expectations, came with unchanged management estimates for full year 2022 production.

Rio shares were little changed in UK trading, having gained more than 80% since pandemic lows in March 2020. Shares for rival and the largest miner listed on the UK stock market, BHP Group (LSE:BHP), are up by over 125% in that time. Copper miner Antofagasta (LSE:ANTO) is up by a similar amount, while the FTSE All Share index is up by close to 55%.

Rio again declared both an ordinary dividend (417 US cents per share) and a special payout (62 cents), which when added to the half-year ordinary and special payments, give a total of 1,040 cents for 2021, up from 557 cents in 2020.

Adjusted profit for Rio’s most profitable commodity iron ore gained by nearly 50% to $17.32 billion. Profit for its second and third most profitable commodities, aluminium and copper, both more than doubled to $2.46 billion and $1.58 billion respectively. 

Chinese commodity demand was at its strongest during the first half of 2021, with the recovery in demand for steel and iron ore from developed and other emerging economies broadly maintaining momentum.

During 2021, Rio refocused its strategy towards commodities which help with climate change or decarbonising. Moves included a binding agreement to acquire the Rincon lithium project in Argentina. Lithium is used in battery production including for electric vehicles. Rio's own climate change goals include reducing operational emissions by 50% come 2030 compared to 2018.  

In January, Rio flagged 2022 iron shipment expectations of between 320 million to 335 million tonnes. That was marginally below City hopes, hindered by Rio’s concerns for tight labour market conditions and production delays from its new greenfields mine at Gudai-Darri, Western Australia. 

ii view:

Tracing its history back to 1873, diversified miner Rio Tinto today employs over 45,000 people worldwide. It has strong presences on the ground in both Australia and North America, although it is located across more than 30 countries. Other group mined commodities include both gold and diamonds. China is its biggest customer, generating around 57% of sales, followed by the USA at just over 12% and Japan at close to 8%. 

The current chief executive took over following the previous head's resignation after the miner previously destroyed a sacred cave complex in Western Australia, raising Environmental, Social and Governance (ESG) concerns. It is now working to rebuild the trust of the Aboriginal people, along with enhancing policies in relation to race, sex discrimination and climate change goals. 

For investors, commodity demand is tied to economic growth, making the industry cyclical in nature. China remains its key customer, while relations between the West and China have in recent years become more strained. Factors outside of its control such as the weather can impact business and a series of ESG concerns persist. 

More favourably, exposure to expected long-term Chinese economic growth will likely remain a key driver. Hard assets like commodities are also considered a hedge against inflation, while shareholder returns are clearly a focus for management. Including only ordinary dividends paid and declared for 2021 puts the shares on a dividend yield of around 10%. In all, and while some caution looks sensible given ongoing pandemic and economic uncertainties, income investors are likely to stick around. 

Positive

  • Exposure to a diverse portfolio of commodities
  • Attractive dividend payment (not guaranteed)

Negative

  • Uncertain global economic outlook
  • Ongoing ethical policy concerns

The average rating of stock market analysts:

Strong hold

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