I’m looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends. Today, I’m putting Rio Tinto plc (LSE: RIO) (NYSE: RIO.US) under the microscope.
Dividend policy
Rio Tinto tells us within the ‘Investors’ section of its website:
“The aim of our progressive dividend policy is to increase the US dollar value of ordinary dividends per share over time. The rate of the total dividend … is determined taking into account the results for the past year and the outlook … The total dividend for each year should be equal to or greater than the total dividend for the previous year. The interim dividend is set at one half of the total dividend for the previous year”.
The dividend is set in US dollars because the company’s financial reports — as with miners in general — are compiled in that currency. For UK investors, sterling dividends can vary due to exchange rates sometimes working in our favour and sometimes against.
Past dividend performance
Rio Tinto increased its dividend at a rate of knots through the boom years of the mid-Noughties … until the party ended. During June 2009 the company announced a $15bn rights issue and said there would be no interim dividend. However, the board said it expected to pay a final dividend “subject to satisfactory trading results, progress on divestments and prevailing market conditions”.
The board did indeed pay a final dividend — $0.45 — giving a full-year payout that was much reduced from the previous year. The table below shows Rio’s dividend record over the past five years.
| Year | Dividend per share ($) |
Growth (%) |
|---|---|---|
| 2012 | 1.67 | +15 |
| 2011 | 1.45 | +34 |
| 2010 | 1.08 | +140 |
| 2009 | 0.45 | -60 |
| 2008 | 1.11* | 0 |
* Restated for the impact of the rights issue
Rio’s cash problems during 2009 arose largely from onerous debt repayment obligations as a result of the company’s acquisition of Canadian aluminium group Alcan at the backend of 2007. Rio’s chief executive, Tom Albanese, got into a bidding war for Alcan and ended up paying a 65% premium at $38bn — arguably the worst mega-deal in mining history.
Albanese placated shareholders with big dividend increases for 2010 (+140%) and 2011 (+34%), and also raised the 2012 interim by 34%. However, dogged by write-downs of Alcan’s assets, his days were numbered, and he was forced to resign before Rio’s 2012 full-year results when Alcan write-downs reached some $28bn.
Dividend prospects
The first dividend decision under new chief executive Sam Walsh was a 4% increase in the final dividend for 2012 — moderating Albanese’s 34% interim hike to a full-year 15% rise at $1.67 covered three times by underlying earnings.
Rio announced an interim dividend of $0.835 (+15%) within its first-half results last week, in line with the policy of paying one half of the total dividend for the previous year. A 15% increase for the full year would be covered a still-healthy 2.6 times by earnings — if analyst earnings forecasts are on the mark.
New chief executive Walsh strikes me as a prudent man, and it looks like he and the board currently see 15% dividend growth as a sustainable rate. Shareholders may well find that preferable to the vanity acquisitions and rollercoaster dividend ride under the previous chief executive.
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> G A Chester does not own any shares mentioned in this article.