28th Jul 2022 18:41
(Alliance News) - Rio Tinto PLC's dividend cut may prove unpopular, though analysts at Barclays on Thursday said it is "not a cause for concern".
The investment bank speculated the Rio Tinto could be building up its coffers for M&A action.
The miner on Wednesday reported weaker half-year profit. Its dividend cut grabbed the headlines, however.
The miner declared an interim dividend of 267.0 US cents, down 29% from 376.0 cents last year. This is still Rio's second-highest interim payout, but it falls short of last years payout when the company benefited from a surge in commodity prices.
However, the dividend ratio and the payout as a percentage of earnings were historically weak, Barclays noted.
"It was the joint lowest payout as a percentage of earnings and second lowest as a percentage of free cashflow in the last 5 years, while proforma net debt post dividend is also the lowest of any half in the last 5 years," Barclays explained.
The dividend amount was 25% below what Barclays estimated and 20% below consensus.
The investment bank added: "Reducing dividend payout into a cyclical downturn is reasonable given declining asset prices and Rio's relatively limited and riskier growth options."
Iron ore prices experienced a drop in demand demand in recent months amid ongoing woes in major steel producer China. The world's second largest economy has seen lockdowns related to its zero-Covid policy reduce economic activity and this has weighed on iron ore markets.
Barclays speculated that Rio Tinto is building a "warchest" for acquisitions.
"In light of the current downturn in asset prices we see nothing wrong with this," Barclays added.
It noted the miner has been criticised in the past for not making acquisitions during economic downturns, despite having an "immaculate balance sheet".
M&A moves could also prove useful as "Rio has relatively limited internal growth options and those it does have are subject to various risks", Barclays added.
Barclays rates Rio at 'underweight' and has a 4,500 pence price target.
Rio Tinto shares closed 1.8% higher at 4,875.48p each in London on Thursday.
For the six months to June 30, Rio's revenue fell by 10% to USD29.78 billion from USD33.08 billion last year, and pretax profit slumped by 32% to USD12.32 billion from USD18.05 billion.
By Eric Cunha; [email protected]
Copyright 2022 Alliance News Limited. All Rights Reserved.
Related Shares:
Rio Tinto