Rio Tinto (LON:RIO) became the latest embattled miner to think the unthinkable on Thursday by slashing its dividend - but analysts questioned whether even that was enough.
Rio said it was abandoning its progressive dividend policy and cutting pay-outs to at least US$1.10 in 2016, from US$2.15 last year, due to lower commodity demand and prices.
The group was following in the footsteps of rival Anglo American (LON:AAL), which in December outlined plans to suspend dividend pay-outs through to the end of 2016, saving it about £1bn a year.
BHP Billiton (LON:BLT) also hinted last month that it may also cut its dividend when it announces half-year results a week on Tuesday.
Rio's chairman Jan du Plessis stressed that Rio had returned more than US$25bn to shareholders in the last five years.
“However, with the continuing uncertain market outlook, the board believes maintaining the progressive dividend policy would constrain the business and act against shareholders' long-term interests,” he said.
“We are therefore replacing the progressive dividend policy with a more flexible approach that will allow the distribution of returns to reflect better the company's position and outlook.”
Miners have faced rising pressure to slash dividends to protect their balance sheets as a slowdown in major commodity consumer China has hit metal prices.
The industry has tried to protect the pay-outs by slashing projects and jobs, but the continued pressure on prices has finally forced them to bow to the inevitable.
Rio’s dividend distribution in the last decade has averaged US$1.33 a share and a dividend cut in 2016 would be the first from the company since 2009.
If it pays the minimum of $1.10 in 2016, that equates to a dividend yield of 4.5%, around the UK market average, assuming a sterling/dollar rate of $1.45 and a share price of £16.76.
But Rio would still be one of the FTSE 100 Index’s ten highest-yielding stocks if it pays US$1.625 – a 6.7% yield to today’s prices.
A play on the iron ore price
Shares in Rio fell 69.5p, or nearly 4%, following the news announced as part of its full-year results on Thursday.
Russ Mould, investment director at AJ Bell, said the fall showed investors still doubted whether it could pay even the minimum US$1.10 in 2016.
“It also puts the pressure on BHP Billiton, which is – according to consensus – still the highest-yielding stock in the FTSE 100 with a yield north of 10%,” he said.
Steve Clayton at Hargreaves Lansdown said Rio was likely to make less in 2016 than it did in 2015, given commodity price falls.
Consensus suggests profits will fall over 40% leaving net income after tax at just $2.5bn, leaving a US$1.10 dividend covered just 1.25 times.
Clayton said: “Rio’s dividend payments will remain under question, especially if commodity prices stay on the floor.
"So after all the huffing and puffing, the protestations and the arguments, Rio has put itself back into the position of offering an attractive yield, the sustainability of which is uncertain, making the stock little more than a play on the iron ore price, which may, or may not recover.”
But mining specialist SP Angel stayed upbeat, saying the cut still put Rio on a 5% prospective yield, which it said should underpin the share price.
The broker’s Sergey Raevsky said: “Further cost cuts of US$1bn and US$1bn of capex cuts should cover the FY 2016 dividend.”
After a raft of one-off charges, there was a net loss in 2015 of US$866mln (US$6.5bn profit), though on an underlying basis Rio stayed in the black albeit with halved profits of US$4.5bn.
This slightly undershot analysts’ expectation though Sam Walsh, chief executive, said it was a ‘strong performance’ given the highly challenging environment.
Rio generated US$9.4bn of cash over the year, he said, and cash flow will remain the focus in the near future.
Capital expenditure is also being slashed by a further US$3bn, to US$4bn and US$5bn in the next two years, with cost cuts of US$1bn also pencilled in for each of the next two years.
Walsh expects only a moderate improvement in global growth in 2016, though demand should recover in the longer term.