Band Goran Damchevski
Rio Tinto Group (LSE: RIO) Investors have been caught on a roller coaster with great success over the past 12 months, followed by the recent plunge in iron ore prices. Dividend yields for investors have reached around 14%, Nevertheless, the apparently attractive return may not be sustainable given the changing macroeconomic situation. We will review Rio Tinto’s dividend policy and earnings potential, to see if recent market volatility represents an opportunity or a convergence towards true value.
The Rio Tinto group probably looks attractive to investors for dividends, given its high dividend yield and payment history of more than ten years.
A simple analysis can reduce the risk of holding Rio Tinto Group for its dividend, and we will focus on the most important aspects below.
Explore this interactive graph for our latest analysis on the Rio Tinto Group!
LSE: RIO Historical Dividend September 20, 2021
Comparing dividend payments to a company’s after-tax net profit is an easy way to check if a dividend is sustainable.
The Rio Tinto Group has paid 60% of its profits in the form of dividends over the past twelve months. This is a healthy payout ratio, which also gives the company profits to finance sustainable growth.
We also measure dividends paid against a company’s leveraged free cash flow, to see if enough cash has been generated to cover the dividend.
Rio Tinto Group paid a conservative 44% of its free cash flow in dividends last year. It is positive to see that the Rio Tinto Group dividend is covered by both earnings and cash flow, as this is usually a sign that the dividend is sustainable.
While the above analysis focuses on dividends versus a company’s earnings, we note the strong net cash position of the Rio Tinto Group, which will allow it to pay larger dividends for some time, s ‘he wishes.
Remember, you can always get an overview of the Rio Tinto Group’s latest financial situation, by viewing our visualization of its financial health.
Dividend sustainability factors
Since the dividend has been reduced in the past, we need to check if the profits are increasing and if this could lead to higher dividends in the future. With recent and rapid earnings per share growth and a payout rate of 60%, this company looks to be an attractive prospect if earnings are reinvested effectively.
However, the company is overwhelmingly dependent on iron ore prices, and their peak in the past year has accounted for a large part of their earnings growth.
This scenario is unlikely to repeat itself as iron ore prices collapse due to lower demand in China. In the graphic below, you can see the extent of the fall.
Iron Ore Spot Price, 20th 2021
In its overview of risk factors (page 6), the company describes “Credit conditions, the cooling of exports and the slowdown in the housing market in China are the main risks for demand”, which unfortunately seems to materialize at present with the fall in Chinese demand and the slowdown in the Chinese real estate market linked to the financial distress of Evergrande.
With that in mind, Rio Tinto is a great stock to watch and look for recovery points as the company uses last year’s excellent performance to stabilize debt and invest in growth projects with $ 3.3 billion. US from CapEx.
In summary, shareholders should always check that Rio Tinto Group’s dividends are affordable, that its dividend payments are relatively stable, and that it has a decent outlook for its earnings and dividend growth. While the past 12 months have been such a huge success that the company has declared a special dividend, we see problems on the horizon and Rio Tinto will need to cut back to stabilize.
The company is in great shape, reducing its debt, financing new growth projects and finding lasting replacements for excavation projects that are coming to an end.
Considering the dividends, the Rio Tinto Group has an acceptable payout ratio and its dividend is well covered by cash flow, and while current investors have been positively surprised, future investors will need to keep an eye out for any potential changes in the payment of dividends..
In addition, we have met 3 warning signs for the Rio Tinto group you need to be aware of it, and one of them is a little rude.
If you are a dividend investor, you can also check out our list of dividend paying stocks offering a yield above 3%.
Simply Wall St analyst Goran Damchevski and Simply Wall St do not have a position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.
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