FTSE 100 miner Rio Tinto (LSE:RIO) announced a record dividend of £12bn. The recent commodity price boom, driven by a surge in popularity of battery metals and rising crude oil prices have led to bumper results for some of the top global miners. Earlier this month, BHP declared a massive US$7.6bn interim dividend and UK miner Antofagasta also announced a bumper $1.4bn payout. On the back of this miner boom and sky-high yield of 13.5%, are Rio Tinto shares the best FTSE 100 investment for me right now? Let’s find out.
Reasons behind the dividend hike
Rio is the world’s 114th largest public listed company and has been a FTSE 100 dividend stalwart for several years now. In the midst of rising inflation in the UK, many investors have turned to Rio shares to counter some budget pressures, and for a good reason.
In 2021, high demand for iron ore in China drove Rio Tinto’s sales and allowed the miner to record profits of $21.4b. This marked a 72% jump in revenue from 2020, the biggest surge in the firm’s history. A post-tax profit of $13bn prompted the board to release a total dividend of $10.4 per share, which included a special dividend of $2.47 per share. Rio’s total dividend is now 87% higher than last year.
Should I buy?
My colleague Christopher Ruane argued that the cyclical nature of the mining industry means that this strong period of demand will cool down. And when this happens, Rio might be forced to cut dividends. However, I think that the last two years have completely shaken up most traditionally cyclical sectors. For example, the notoriously cyclical UK housing industry is riding a decade-long boom and analysts predicted a crash in early 2021. But driven by the increased demand, sales figures and new home prices have constantly been close to all-time highs.
Also, given the global political climate, defence spending has been increasing steadily over the last decade. Even during the coronavirus’s peak in 2021, several prominent economies raised defence spending. China increased its defence budget by 6.8% to 1.35trn yuan (US$209bn) in 2021. The Stockholm International Peace Research Institute’s report showed that global military expenditure reached US$1.98trn in 2020, 2.6% higher than 2019.
And military development is a commodity-heavy venture that requires metals, fuel, and gold. Increased military spending over the next decade could support the commodity market. Although the sky high crude oil prices may cool down in the short term, I think the current volatility in the market will boost commodities for the foreseeable future.
Concerns and verdict
Analysts expect the mass adoption of alternatives like lithium to curb the demand for traditional metals. But creating a supply-demand balance for new commodities could take years of R&D and lobbying. Also, geopolitical tensions could result in trade restrictions. And the commodity market has been fluctuating a lot in the past year. Prices in the current climate could come tumbling down.
Although this is a huge risk, Rio’s board expects steady growth in 2022 as well. The company is diversifying into battery metals, including lithium. Although I do not expect the current 13.5% yield to continue, I think the mining giant can maintain an above-average yield, which is why I am considering Rio Tinto shares for my portfolio right now.