Why the Rio Tinto Limited share price is falling on its profit report

Rio Tinto Limited's (ASX:RIO) share price could be in for a rough start to trade today following the release of its results last night but any dip is a buying opportunity in my opinion.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Looking for more blue-chip ideas? See the details below on how you can get two new buy ideas every month from the experts at the Motley Fool.

Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »