Shares in Rio Tinto (LSE: RIO) have fallen by over 5% today as the company released its results for the 2015 financial year. As expected, they show that the mining sector is undergoing a hugely challenging period and this has caused the company’s underlying earnings to fall by over 50% to $4.5bn.
Although Rio Tinto has maintained dividends for 2015 at $2.15 per share, it has decided to end its progressive policy that had meant dividends would either be maintained or increased in each year. This has been dropped in favour of a more flexible approach, which is likely to see dividends more closely linked to profitability. Rio Tinto said in today’s update that dividends for the 2016 year will be no less than $1.10 per share. This equates to a dividend yield of 4.5% at today’s price and exchange rate.
Meanwhile, Rio Tinto’s operating cash flow for 2015 stood at $9.4bn and with it having strengthened its balance sheet, it appears to be in relatively strong shape to cope with further challenges in the commodities market. For example, it has reduced its net debt to $13.8bn, which is a fall of $700m from last year, and expects to implement further cost-cutting measures in future. In fact, it intends to reduce its operating costs by $1bn in 2016 and plans a cut of $3bn to its capital expenditure over the next two years in addition to previously-announced cuts.
Clearly, today’s results make for rather grim reading for investors in Rio Tinto. A major fall in profit, a cut in dividends in 2016 and beyond, as well as a downbeat outlook for the commodities sector all point to further problems over the medium term.
Look to the future
While things could get worse before they get better, Rio Tinto continues to offer a more appealing long-term outlook than many of its peers. That’s largely because of its sound financial position, with the company’s balance sheet and cash flow being vastly superior to most of its mining sector peers. And with further cost reductions to come, its cost curve is likely to fall in the coming months and allow it to outlast most of its peers should iron ore and other commodity prices remain low.
Although a cut in Rio Tinto’s dividend is disappointing and means it’s set to yield only 10% more than the FTSE 100 in 2016, it’s nevertheless a necessary step for the company to take. There’s little point in putting additional pressure on any company’s cash flow during a tough period and so it makes sense to cut back on items that aren’t required, such as dividends. In the long run, doing so should create a more stable and sustainable business.
Looking ahead, Rio Tinto is forecast to post a fall in its earnings of 15% in the current year. This puts it on a forward price-to-earnings (P/E) ratio of just 11.4. This indicates that it offers good value for money and while additional challenges seem inevitable, it could be worth buying for the long term.
