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Rio Tinto delivers $5.6bn special dividend surprise as its yield jumped to 11%

Our biggest iron ore producer is splashing the cash! The Rio Tinto Limited (ASX: RIO) share price is likely to find support tomorrow morning after the miner declared a special dividend as it posted a consensus-beating underlying full year profit.

UK investors were the first to react to the news with the Rio Tinto’s London-listed shares jumping 1.9% at the open to 4,470 pence.

The miner said it would reward shareholders with a fully franked special dividend worth US$4 billion on top of its final dividend of US$1.80, which was the same amount it paid out last year although the weaker Australian dollar means Aussie shareholders should see around an 11% boost.

It’s raining dividends

The total distribution Aussie shareholders will receive is nearly $5.90 per share. Add in its interim dividend plus all the franking credits and the stock has a whopping 11.4% yield for 2018 based on Wednesay’s closing share price! This doesn’t consider the share buybacks that Rio Tinto had undertaken.

The dividends will lift the total capital returns from Rio Tinto to a record US$13.5 billion as the miner’s coffers overflowed from asset sales, like the Grasberg copper mine in Indonesia and the Dunkerque aluminium smelter in France, and the stubbornly high iron ore price.

However, Rio Tinto reported a 15% drop in its 2018 operating cash flow to US$11.8 billion from the year before due to the timing of tax payments and higher inventory balances. Rio Tinto’s financial year is the same as the calendar year.

The miner was also plagued by higher costs with rises in energy and raw materials putting pressure on margins, which was evidenced by a US$0.5 billion increase in revenue to $40.5 billion but a 2% drop in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to US$18.1 billion.

Where the growth is coming from

While Rio Tinto is predominantly an iron ore producer with around 60% of earnings coming from that one commodity, it was its copper and diamonds division that provided just about all of the earnings growth for the year.

Underlying EBITDA for copper and diamonds surged 46% while iron ore retreated 2% and aluminium weakened by 10%.

But investors are likely to overlook these issues as the latest drilling results from Rio Tinto’s Winu Project will overshadow the spots of weakness.

Promising drilling results

The drilling results, which were announced at the same time as its full year earnings report card, showed promising signs of copper, gold and silver.

The miner has so far drilled 24 holes and plans to do more extensive drilling. Winu is just 130 kilometres from Newcrest Mining Limited’s (ASX: NCM) flagship Telfer mine.

Rio Tinto isn’t the only miner to declare a special dividend either. It’s peers BHP Group Ltd (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and South32 Ltd (ASX: S32) have also joined the special dividend club.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 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 Scott Phillips.

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