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Rio Tinto’s capital return crashes by half on $2.5 billion dividend payout

The Rio Tinto Limited (ASX: RIO) share price could come under pressure tomorrow after the miner posted a drop in its half year results and a smaller than expected cash handout.

Australia’s largest iron ore miner posted a 6% decline in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to US$9.6 billion ($13.4 billion) and declared a US$1.55 a share interim dividend.

The fall in earnings comes even as the iron ore price remains stubbornly high through the COVID-19 mayhem and is driven by falls in the aluminium and copper prices.

No dividend surprise

But what I think will disappoint more is the lack of a special dividend or other capital returns. Even though the interim dividend is 3% above what it paid last year, total cash returns paid to shareholders in the first half have fallen by more than half to US$3.8 billion from US$7.8 billion.

This is largely because Rio Tinto paid a special dividend worth US$3.9 billion in April 2019.

As I wrote yesterday, some experts were anticipating another special dividend from Rio Tinto as the miner holds excess cash on its balance sheet.

While there’s little consensus on what the interim dividend will be with estimates ranging from US$0.94 to US$2.21 a share, I think the US$1.55 will disappoint without an additional supplement.

Nervous outlook despite positive signs

Investors will view the dividend decision as a sign that management is nervous about the outlook even as demand for iron ore is holding up in this highly unpredictable environment, thanks in no small part to Vale SA’s coronavirus-stricken supply.

Chinese demand for the steel making ingredient is expected to remain robust despite growing tensions between China and Australia.

Our largest trading partner is counting on infrastructure construction to kick-start its sagging economy.

FY20 guidance intact

Rio Tinto reiterated its production guidance. It’s aiming to produce 324 million to 334 million tonnes of iron ore from its Pilbara mine at a unit cost of US$14-US$15 per wet metric tonne on a free-on-board (FOB) basis.

The miner’s aluminium business is the thorn in the side of the group, but this is well flagged and understood by the market.

Is Rio Tinto share price a buy?

Notwithstanding the negatives from the results, I am happy to remain overweight on the Rio Tinto share price.

While I would have rather it paid a special dividend, the stock is still yielding over 7% if franking credits are included. That’s a pretty good yield in this environment.

Another special dividend candidate

Looking forward, investors will now have to pin their capital return hopes on fellow iron ore miner Fortescue Metals Group Limited (ASX: FMG). Fortescue is better placed to surprise on this front than BHP Group Ltd (ASX: BHP).

The Rio Tinto share price lost 0.7% to $103.40 on Wednesday, while the BHP share price shed 2% to $37.30 and the FMG share price slipped 0.2% to $16.85.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

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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