ASX 200 stock nosedives 10% on new lithium play

Investors have hit the sell button after news from the mining royalty company this morning.

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As the S&P/ASX 200 Index (ASX: XJO) slips around 0.3% into the red on Friday, one ASX 200 stock has copped a hammering.

Deterra Royalties Ltd (ASX: DRR) shares took a significant hit at the open and were down 10% in early trade. However, the mining royalty company's shares have since regained some ground and are trading at $4.18, with a trailing dividend yield of 7.14%.

This morning's sharp decline followed the company's announcement of a substantial acquisition and a major change to its dividend policy.

Why is this ASX 200 stock under pressure?

The slide in Deterra Royalties' stock price came after it announced its new move into the lithium domain. It has made an all-cash offer to acquire UK-based Trident Royalties Plc for $276 million (144 million pounds).

According to the announcement, Trident is a "growth-focused diversified mining royalty and streaming company", boasting a portfolio of "royalties and offtakes".

Its portfolio includes 21 royalties and offtake contracts, giving the ASX 200 stock exposure to lithium, gold, silver, copper, zinc, and more. As such, the acquisition marks a pivot towards green metals and away from its traditional iron ore royalties, including those with BHP Group Ltd (ASX: BHP).

Deterra's offer for Trident is set at 49 pence per share, equal to AUD 93.4 cents per share at the current exchange rate. This represents a premium of 22.5% over Trident's latest closing price of 40 pence (AUD 76.3 cents).

Trident's board has unanimously recommended shareholders vote in favour of the acquisition. Key shareholders – representing about 28.7% of Trident's share capital – have also voted in favour.

If successful, the acquisition will be completed via a UK scheme of arrangement

The market has reacted negatively to ASX 200 stock's announcements, as seen in the price action today. East 72 fund manager Andrew Brown wasn't keen on the deal either, suggesting it diluted the value of Deterra's existing BHP royalties.

He expressed scepticism about the move into lithium, implying it might turn a "brilliant asset into a terrible company", according to the Australian Financial Review.

"Have somebody cash the cheque and buy back stock. If the royalty is worth buying, Franco Nevada will buy it first", he added. "I don't hold Deterra, but wish I could and hope an activist [investor] comes along".

Dividend policy changes and market reaction

In addition to the acquisition news, Deterra announced changes to its dividend policy. Previously, the company had a 100% net profit after tax (NPAT) payout ratio.

The FY 2024 final dividend will remain the same. However, moving forward, Deterra aims for a minimum payout ratio of 50% of NPAT. This change aims to balance capital growth with income returns.

It will also implement a dividend reinvestment plan (DRP). The DRP will allow its investors to automatically invest dividends received without incurring brokerage fees.

Deterra managing director Julian Andrews had this to say:

While consistent with our well established and overarching capital management strategy, today's adjustment to our dividend policy is designed to better align it with Deterra's targeted longer-term balance between capital growth and income returns.

Importantly, our discipline to return capital when not required for investment or balance sheet management remains unchanged.

Deterra has returned more than $480 million to shareholders as dividends since its listing towards the end of 2020.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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