Rio Tinto Limited's (ASX: RIO) big cash splash wasn't enough to win over investors in the UK with its London traded stock slumping 2.6% when the world's biggest iron ore miner reported a surge in half year profits and promised a US$3 billion cash giveaway to shareholders, which included a record interim dividend.
The first half dividend was lifted 144% to US$1.10 a share and management committed a further US$1 billion to buy back shares on the London Stock Exchange – proving that the miner doesn't need surging commodity prices to generate strong cash flows.
The buyback is in addition to the US$500 million program the miner announced in February this year, of which US$200 million remains untouched. The total buyback will be completed by the end of this calendar year.
The cash return is fuelled by a 95% increase in net operating cash flow to US$6.31 billion, that is driven in large part by higher commodity prices.
However, investors in the UK have taken a "glass half empty" view of the results, which sets the scene for the local stock to trade lower today. Rio Tinto posted underlying earnings of US$3.94 billion for the six months to 30 June, 2017 – a 152% increase from the same time last year, but around 5% below consensus expectations.
What's 5% between friends? A lot when you are talking about such a large profit number and when the stock had been outperforming strongly with Rio Tinto jumping by a third over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has only managed a 3.3% gain.
The stronger Australian dollar and US$166 million in impairment charges could dampen enthusiasm for the stock in Australia, but I suspect the dip will be relatively short-lived as there is plenty to like about Rio Tinto's result.
For one, the cash giveaway is likely to be stepped up in the second half as Rio Tinto is expected to receive US$2.45 billion from the sale of its Coal & Allied thermal coal assets to Yancoal. Rio Tinto's coffers will swell even further from its cost cutting program, which is running six months ahead of expectations.
The miner believes that it will generate an additional cumulative cash flow of US$5 billion from 2017 to the end of 2021 from productivity improvements, while capital expenditure will be held relatively steady for the next few years at least.
Investors can also look forward to the three key growth projects undertaken by Rio Tinto – The Silvergrass iron ore development, the Oyu Tolgoi underground copper project in Mongolia, and the Amrun bauxite project in Queensland.
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