| Where Do Dividends Rank on Rio Tinto’s ‘Radar Screen’? | |
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Is Rio Tinto Well Positioned for Even Tougher Times Ahead? (Continued from Prior Part) Dividend sustainability
In the face of deteriorating commodity prices, investors are understandably concerned about miners’ ability to sustain dividends (DVY). Recently, Freeport-McMoRan (FCX) suspended its dividends. Earlier, Glencore (GLNCY) also suspended its dividends. Anglo American (AAUKY) has suspended its dividends for the rest of 2015 and 2016. Upon resumption, the policy will be changed to one based on a payout ratio rather than a progressive dividend. Miners are looking for more sustainable dividend payouts.
Dividends are high on the ‘radar screen’
In the context of dividends, Rio Tinto’s (RIO) CEO (chief executive officer) Sam Walsh stated in a Bloomberg interview that his company’s capital allocation priorities are the following in order of importance:
- sustaining capital expenditure, which is less than $2.5 billion
- progressive dividends
- growth projects
- paying off debt
- further shareholder returns
Considering this framework, dividends are still high on Rio’s ‘radar screen.’ Walsh believes that shareholders have put their money in the company in good faith and they deserve fair returns.
Guidance for capex downgraded
In a separate press release on December 8, 2015, Rio Tinto cut its capex (capital expenditure) guidance for 2015 and 2016 to $5 billion, from $5.5 billion and $6 billion, respectively. It hasn’t yet announced any capex cuts for 2017, which still stands at $7 billion.
When it comes to spot prices, Rio seems a bit short on funding its dividends through free cash flows. Further operating capital and capex cuts could position Rio comfortably as far as dividends are concerned. Rio also has a very strong balance sheet with low financial leverage, which should support dividend payments going forward.
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Vale Inco is a nickel and copper producing company based in Brazil. Vale Inco produces nickel, copper, gold, palladium and platinum in Canada, and holds various exploration projects in Australia, in Brazil, in Canada, in Indonesia, in New Caledonia, in Peru and in Turkey. Its main assets in production are MCCREEDY WEST MINE and VICTORIA - INCO in Canada and its main exploration properties are EAGLE CREEK, MEL PROJECT, B20, SHEBANDOWAN - BAND-ORE and GARSON MINE in Canada and GOONGARRIE SOUTH - GOONGARRIE, HIGHWAY - GOONGARRIE, SCOTIA - GOONGARRIE, BIG FOUR HERON - GOONGARRIE, GOONGARRIE HILL - GOONGARRIE, TOBY PROPERTY and BORDER DOWNS in Australia. |