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Should you buy Rio Tinto plc for its 5.4% dividend after final results?

The FTSE 100 is home to many companies that reward shareholders with big dividend payments. Rio Tinto (LSE: RIO) is one such company. Today, the mining giant has released full-year results for FY2017. Let’s take a closer look at these results and assess the group’s dividend prospects.

Good-looking FY2017 results

Today’s full-year results look good. Consolidated sales revenue came in at $40bn, $6.2bn higher than in 2016, as a result of higher commodity prices. Underlying EBITDA rose 38%, while underlying earnings per share jumped 70% to $4.83. Cash flow was strong too. Net cash from operating activities climbed 64% to $13.8bn, while free cash flow also rose 64% to $9.5bn.

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Furthermore, the company paid down a pile of debt, and announced that it will be completing a $1bn share buyback programme this year.

Chief executive J-S Jacques was upbeat about the results, stating: “Our strong balance sheet, world-class assets and disciplined allocation of capital puts us in the unique position of being able to invest in high-value growth through the cycle, and consistently deliver superior cash returns to shareholders.”

Positive dividend news

Turning to the dividend, it’s good news for income investors. The company today declared a record full-year ordinary dividend of $5.2bn, equivalent to $2.90 per share. At the current exchange rate and share price, that payout equates to a yield of a high 5.4%.

Does that high yield make Rio Tinto a ‘buy’ for its dividend?

A 5.4% yield

Rio Tinto’s big dividend yield does look attractive, in the current low-interest environment.

Dividend coverage (earnings divided by dividends) is reasonably strong, at 1.7 times, and the payout is also comfortably covered by cashflow. With free cashflow of $9.5bn, the free cashflow- to-dividend ratio is a healthy 1.8 times.

However, if you’re thinking about buying Rio Tinto for its dividend, there’s one thing you should know.

Cyclical industry

Income investors should be aware that mining is a cyclical sector. Demand for commodities such as iron ore can fluctuate widely, meaning that the prices companies such as Rio Tinto receive for their products are also subject to wild swings. From an income-investing perspective, this can cause problems.

During the good times, the big global miners are flush with cash. As a result, investors get rewarded with big dividends. However, when commodity prices drop, cash flow can dry up, affecting dividend payments.

For example, when commodity prices fell sharply several years ago, Rio Tinto was forced to cut its dividend. The payout was slashed from $2.15 per share in 2015, to $1.70 in 2016. The company also scaled back its dividend payments heavily during the Global Financial Crisis, paying no interim dividend in 2009.

Looking at today’s big payout, Rio Tinto has recovered from these downturns. However, the cyclical nature of the industry is something to keep in mind, especially if you depend on your dividends for income.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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