Stock of the Week: Rio Tinto

Mining giant has paid bumper dividends since the pandemic, but can the commodity bull run be sustained?

James Gard 20 August, 2021 | 10:18AM
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Rival BHP (BHP) may have stolen the headlines this week for announcing plans to leave London but our Twitter followers have gone for Rio Tinto (RIO) in our mining-themed stock of the week. Despite being in the spotlight because of rising ESG concerns, miners are in a sweet spot in 2021 amid surging prices for commodities likes copper and iron ore. Copper in particular has been a lightning rod for the economic recovery from the pandemic and part of the “reflation trade” that has put global investors in bullish mode. But this week global stock markets have slammed into reverse and previously booming resources companies have sold off sharply. Fears over China’s growth, the Federal Reserve’s next move, and rising coronavirus cases worldwide have upset the upbeat narrative.

Rio Tinto’s shares have fallen around 10% this month alone, shedding some of the gains since autumn 2020 when the global economy started to pick up again. They’re off around 7% since the start of this week, having fallen from £56 per share to £52. That means that they are now closer to the fair value of £50 assigned by Morningstar analysts. “The shares remain overvalued, principally a function of near-record iron ore and copper prices. We expect both to cool and for longer-term earnings to decline as the benefit of China’s stimulus wanes and the post-Covid-19 bump to global economic growth subsides,” says mining analyst Matthew Hodge. Still, recent results were strong, although the comparison with the the Covid-affected first half of 2020 were bound to be flattering: net profit after tax for the first half of 2021 were $12.2 billion, compared with $4.5 billion in the first half of 2020, although the majority of this rise is down to the higher iron ore price.

Rio Tinto One Year Share Price

Rio Tinto share price

Like BHP, Rio Tinto has been a dividend powerhouse since the pandemic started when many other companies have axed or reduced their payouts. To illustrate, in the first half of 2021 Rio paid out $3.76 per share in ordinary dividends, up from $1.55 in the first half of 2020. Including the special dividend, the total payout was $5.61 per share, a 262% increase from the same period last year. According to the Link Dividend Monitor, Rio Tinto was the biggest dividend payer in the UK in the second quarter of 2021. The mining sector provided £6 billion in dividends in Q2, up from £3.5 billion in the same period of 2020. But as Morningstar’s Hodge points out, these dividends are subject ot the boom and bust of the commodities cycle. “Resource companies are notoriously unreliable dividend-payers, with cyclical commodity prices often bringing attractive yields undone,” he says.

An ESG Crisis

Environmental, social and governance worries are never far from mining investors’ minds. Last year Rio Tinto provided its own case study in how (not) to handle an ESG crisis that will likely be studied in business schools for years to come. In May 2020, two sacred cave sites dating back 46,000 years were destroyed in Pilbara, Western Australia, after an explosion while Rio Tinto mined for iron ore. The incident caused great controversy in Australia and triggered a parliamentary inquiry. Rio itself conducted its own internal review and decided that heads didn’t need to roll. Forfeited bonuses would be the best remedy, it ruled. Amid pressure from all sides, not least Australian pension funds, the Rio board decided in the end that the chief executive would step down. Morningstar-owned ESG ratings firm Sustainalytics raised its ESG Risk Rating to High after the episode. “Rio Tinto has suffered considerable damage to its reputation, trust and social licence to operate.” The row also re-ignited the debate over whether ESG-minded investors can ever hold mining companies. On the debit side is incidents like this, but resources companies are also responsible for digging out materials used in electric vehicles and solar panels.

 

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is content editor for Morningstar.co.uk