Rio Tinto (RIO) Stock Falls on Dividend Review, Jim Cramer’s Take

The company paid a final dividend of $1.075 a share, though it said the 2016 dividend would not be less than $1.10 a share.

Rio Tinto chief executive Sam Walsh put a positive spin on the numbers, citing “a highly challenging environment” and signalled some cost cutting is on the cards.

The full-year net result was a loss of $866 million, which compares with a profit of $6.5 billion for 2014.

“We are also reducing our capital expenditure to $4bn in 2016 and $5bn in 2017”.

JP Morgan Cazenove gave shares of Rio Tinto PLC a price target of 1850 indicating a potential increase of 8.5% from Rio Tinto PLC’s current price of 1705. However, some analysts think the dividend could be cut in half, officially putting the miner’s progressive dividend policy to bed.

“At the same time, we have significantly strengthened our balance sheet and finished 2015 with net debt of $13.8bn, which is $700m better than the $14.5bn pro-forma position at the end of 2014”.

“The board expects total cash returns to shareholders over the longer term to be in a range of 40-60% of underlying earnings in aggregate through the cycle”, reads the new dividend policy.

“While the market is gaining, it is on the back of defensive sectors so healthcare, telecom and property trusts, which are those traditional defensive sectors”, Ms Lee said.

The price of iron ore, which is responsible for approximately two-thirds of the company’s earnings, has fallen 45% over the past 12 months, a decline reflected in the 51% year-on-year drop in underlying earnings to $4.54bn, a figure which was however in line with analysts’ expectations.

Indeed, Standard & Poor’s took its knife to BHP’s credit rating earlier this month, downgrading it from an A+ to an A. That’s not so bad, but it also cautioned further cuts depending on BHP’s earnings results and commentary on 23 February. China’s high debt levels are expected to constrain the central government’s ability to broaden its stimulus policies, limiting the scope for a meaningful investment boost in 2016.

BHP Billiton (LON:BLT) is likely to cut its dividend payouts, in the wake of rival Rio Tinto (LON:RIO)’s decision to ditch its “progressive” policy for a more flexible approach. Both these segments helped the organization achieve its 340 million tons guidance for CY15 iron ore shipment. At those prices, Rio still makes about $US17 to $US27 a tonne cash, having cut iron ore cash costs from $US14.90 to about $US13 at spot prices. The 2015 loss was primarily driven by non-cash exchange rate and derivative losses of $3.3 billion and impairment charges of $1.8 billion, Rio said.

The bank said the company still needed to realign its strategy to create long-term value.

The miner paid out almost US$6.5 billion in dividends in financial year 2015, representing a 1.7% increase on the prior year.