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.
