Rio Tinto Limited (ASX: RIO) has ditched its progressive dividend policy, sensibly and likely to the relief of many investors.

Reporting its 2015 financial year results today, the company’s chairman Jan Du Plessis told shareholders,

“The board has announced today a final dividend of 107.5 US cents per share, bringing the 2015 full year dividend to 215 US cents per share, in line with 2014.”

“Over the past five years, we have returned more than $25 billion to our shareholders, underlining our commitment to shareholder returns. However, with the continuing uncertain market outlook, the board believes that maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests.”

“We are therefore replacing the progressive dividend policy with a more flexible approach that will allow the distribution of returns to reflect better the company’s position and outlook. For 2016, we intend that the full year dividend will not be less than 110 US cents per share.” [Emphasis mine].

In simple terms, Rio Tinto is slashing its dividend virtually in half for the 2016 financial year. Rival BHP Billiton Limited (ASX: BHP) is likely to follow suit and also ditch its progressive dividend policy when it reports later this month.

You can see why Rio has given its dividend policy the boot from the results below.

  • Revenues down 26% from US$50 billion in 2014 to US$36.8 billion
  • Earnings before interest tax, depreciation and amortisation (EBITDA) down 36% to US$12.6 billion.
  • Underlying earnings more than halved (down 51%) from US$9.3 billion in 2014 to US$4.5 billion in 2015.
  • Statutory net loss of US$866 million, compared to a profit of US$6.5 billion in 2014, after taking US$5.4 billion in impairments, exchange losses, restructuring costs and other one-off items.
  • Every one of Rio’s commodities saw revenues and underlying earnings sink, with iron ore revenues down 34%.

The good news is that the company generated US$9.4 billion in operating cash flow, although that was still down from the previous financial year’s US$14.3 billion.

Foolish takeaway

It is always dangerous to treat commodity producers as dividend plays – confirmed by the actions of Rio Tinto today.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.