The share price of Rio Tinto Limited (ASX: RIO) could come under pressure on Thursday when the market opens after the iron ore major posted its first half results after the market closed on Wednesday.
The miner's London listed stock slumped 3% when the UK market opened and dragged BHP Billion Limited's (ASX: BHP) UK share price down 2% in the process.
The fall in Rio Tinto's UK share price comes despite the fact that management handed out some goodies to shareholders that include a record interim dividend and a US$1 billion expansion of its share buyback program.
Many weren't expecting a top-up to the miner's capital return as the sale of some of its assets such as its Indonesian Grasberg joint-venture didn't finalise, but Rio Tinto did manage to complete the sale of its remaining coal assets in Queensland for US$4 billion.
What this means is that when Grasberg is finally sold, Rio Tinto is likely to announce another increase to its capital return program.
The miner has signed a non-binding agreement to offload Grasberg for US$3.5 billion, and the after-tax proceeds from this asset sale will go on top of the US$4 billion it currently holds in reserves that it wants to hand back to shareholders.
The cash-splash doesn't stop there. Income seeking shareholders would also be pleased that management has declared a US$1.27 a share half year dividend.
This should equate to roughly $1.72 in Australian dollars at the current exchange rate. This is substantially higher than the $1.38 per share it paid to shareholders this time last year.
Rio Tinto's underlying earnings increased 12% to US$4.4 billion which is pretty much in line with consensus estimates but if investors wanted to be picky, there are a few dark spots in the overall result which is likely to pressure its share price.
The first is a 38% drop in free cash flow to US$2.9 billion for the six months ended June 30, 2018, and the big 34% increase in capital expenditure.
The miner is also having issues resolving its tax dispute with the Mongolian government that relates to its giant Oyu Tolgoi copper mine in that country.
The Australian Financial Review is also reporting rumours that the Mongolian government wants to reopen negotiations around the 2009 investment agreement on the project to bring forward revenue.
Meanwhile, Rio Tinto is sticking to its production guidance given at its last quarterly production report and said that capital expenditure will rise to US$6.5 billion in 2020, up from its original estimate of US$6 billion.
I actually don't think the result is quite so bad although some might see it as a reason to take profit after its share price rallied 24% over the past year compared to a modest 9% increase in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Using the "least dirty shirt" strategy, investors should buy the dip as there are few blue-chips outside of resources that are this well placed to grow revenue and profits, while having a couple of spare billion in the bank to fund a generous capital return program.
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