I have been eyeing miner Rio Tinto (LSE: RIO) as a possible addition to my shares portfolio for a while. The well-known company has had a juicy dividend yield in recent years. It is a well-established mining business that I think should continue to do well for decades to come. So, could now be the time for me to buy Rio Tinto shares?
Big dividend cut
The company announced its full-year results today, including details of its final dividend.
The total dividend for the year has been cut by 53%, a big drop.
It still comes in at $4.92 per share though, which is around £4.07. With Rio Tinto shares changing hands for a little over £60 apiece, that means that the forward-looking yield is 6.8%.
So while the dividend may have been cut sharply, the yield is still higher than that offered by the majority of FTSE 100 companies. That is attractive to me.
What comes next
Last year saw revenues, profits and free cash flow at the miner all fall sharply. Metals prices could keep falling, in which case earnings may move lower again this year. That could mean a further dividend cut.
But even in what may sound like a poor year, Rio Tinto did well. It posted what it called “solid financial results”. Consolidated sales revenue was over $1bn per week on average. Free cash flow almost halved, yet still topped $9bn. Post-tax profits equated to around $240m per week. That is over a million dollars an hour!
As the numbers show, Rio Tinto is an absolute monster of a business. I think it can stay that way. It benefits from a large portfolio of projects, large customer base and deep expertise in the practicalities of extracting and selling minerals.
I’m tempted to buy
The key issue when it comes to how profitable Rio Tinto might be, however, is largely outside its control. Mining is a cyclical business. Prices for many metals fell last year, after a record 2021.
If prices keep moving down, profits could do the same. That might mean smaller dividends.
But I like the strong position Rio Tinto has in an industry I expect to benefit from strong long-term demand. Even after today’s cut, the dividend still looks attractive to me.
There has been some evidence that iron ore pricing is firming. China opening up again could drive industrial activity and demand for metals like iron. If that happens, buying Rio Tinto shares at today’s price could be a lucrative move for my portfolio.
Wait and see
But I think it is too early to call the bottom of the metals pricing cycle. Depending on what happens to the global economy over the next several years, prices might rise. However, they could also still have a long way to fall from here.
So although I am tempted to buy into Rio Tinto, I am holding off for now.
Once I think there are consistently clear signs that metal prices will maintain or increase their level, I will revisit my decision.
