Flush with cash thanks to soaring commodity prices, the mining giant Rio Tinto wants to avoid adding to its record of ill-timed splurges on major acquisitions. The obvious answer? Hand back a record dividend to keep shareholders sweet.
It will pay out a total $10.40 a share to investors, one of the biggest total dividends ever declared in British corporate history, and which, at the current share price, equates to a bumper 13.7 per cent dividend yield. That’s also a rise of more than 80 per cent on the previous year. Amid rapidly rising inflation and the clamour for real yields, it’s little wonder that the shares are priced more than a quarter higher than at the start of 2020 despite easing in value over the past 12 months.
Indeed, a dividend yield of that magnitude is always a sign that such payouts are not expected to last. Earnings were turbo-charged by rising commodity prices as tight supply failed to keep up with ricocheting global demand after the pandemic. The average realised price for iron ore, the core commodity produced by the group, rose 45 per cent last year, easily offsetting the impact of lower production and higher costs associated with labour and energy costs.
Prices for the steel-making ingredient declined by a quarter during the second half of the year, with analysts expecting them to fall further. That explains why the group has failed to attract more credit from investors. Its enterprise value is just 3.5 times forecast earnings before interest, taxes, depreciation and amortisation (ebitda) this year, down from a multiple of more than six this time last year and some way below the 10-year average.
Environmental and governance scandals including the destruction of an ancient Aboriginal site in 2020 and more recently, the publication of a damaging external report into Rio’s workplace culture, will have struck it from some investors’ shopping lists.
Chief executive Jakob Stausholm, who was brought into the group in the wake of a public outcry over Juukan Gorge, talked down the prospect of major M&A soon. That’s not to say it hasn’t struck any deals, notably the $825 million purchase of the Rincon lithium mine in Argentina at the end of last year, but that’s small fry. Of the $8 billion earmarked for capital expenditure this year, the bulk is due to be spent on sustaining existing assets, replacing mines and decarbonising its operations.
However, organic growth is tough for a colossus like Rio. The push towards decarbonisation among corporations and governments makes a stronger case for the miner reducing its overwhelming reliance on iron ore, which accounted for almost 72 per cent of ebitda last year. Progress in producing metals and minerals needed in the sustainability drive has been mixed. An agreement over a long-running dispute with the Mongolian government means that underground mining has begun at its Oyu Tolgoi project, which is expected to produce an average of 500,000 tonnes of copper a year by 2028. But the cancellation of permits and plans for Rio’s proposed $2.4 billion Jadar lithium mine by the Serbian government last month has cast doubt over the future of the project, which had been expected to generate 58,000 tonnes of refined battery-grade lithium carbonate every year. Rio has said it is “committed to exploring all options” and was reviewing the legal basis of the decision.
Analysts at RBC Capital have forecast a dividend of $5 a share for this year, which would still equate to a solid 6.6 per cent dividend yield at the current share price. That makes the shares worth holding on to, even if regaining last year’s highs will be a challenge in the medium term.
ADVICE Hold
WHY The shares might struggle to move higher any time soon, but there is a good dividend on offer
Capital & Counties
Retail landlords have a low bar to surpass this year when it comes demonstrating improvement in their financials, so it’s no wonder that full-year figures from commercial landlord Capital & Counties were met with little enthusiasm by investors.
A rise in underlying net rental income of a fifth last year looks good, but that’s against a previous year when that same metric fell by a third as retailers and restaurants withheld rent. Things have improved for the landlord, which focuses on London’s Covent Garden and West End, since the depths of the pandemic. Footfall to the capital’s entertainment mecca has strengthened after the emergence of the Omicron variant last year hampered the recovery in visits from tourists and locals to the West End.
Rent collection improved to 92 per cent of the amount owed for the March rent quarter, against an average of 75 per cent over the whole of last year. The vacancy rate also declined to 2.6 per cent, down from 3.5 per cent at the end of 2020.
But what about the longer-term growth potential for rental income? That’s on shakier ground. London’s West End might have a unique selling point and cultural heritage that the basic standard shopping centre or high street unit does not. The landlord has been attempting to add more luxury brands such as the watchmaker TAG Heuer and outfits that have their roots online, such as the fashion retailer Reformation, to its tenant list.
But you can’t fight broader market trends, where rents are falling, and potential occupiers across the West End are under many of the same pressures that retailers, bars and restaurants are under nationwide including the cost squeeze from rapidly rising inflation.
After stripping out the impact of disposals, the estimated rental value (ERV) — the rent that valuers think could be obtained on a new letting or rent review of a property — of the portfolio is roughly a quarter lower than in 2019, a year when the ERV for Covent Garden assets also declined slightly. A share price at a steep 35 per cent discount to forecast net asset value at the end of December is justified.
ADVICE Avoid
WHY Falling retail property valuations could continue to weight on the Reit’s NAV
