RIO, a holding within the Blue Chip Strategy since April last year, reported a bumper interim set of numbers overnight which has led to the stock bouncing to new highs of around $136.00 per share this morning.
For the half, RIO reported earnings before interest, tax, depreciation and amortisation (EBITDA) of US$21bn and underlying earnings of US$12.2bn. The result has exceeded consensus analyst expectations and allowed the company to declare a record interim dividend of US$5.61 per share (or $7.60 in Australian dollars) fully franked. Including franking credits, the gross dividend will be $10.86, which is a staggering 8% yield at current levels for RIO. The stock is set to go ex-dividend on 12 August, with payment due on 23 September.
While the result exceeded expectations, there were a few issues with the results. RIO’s iron ore shipments continue to disappoint, and its costs have steadily increased such that BHP Billiton (BHP) and Fortescue Metals (FMG) are now lower-cost operators. Considering RIO generates roughly 80% of its earnings from iron ore, the cost blowouts explain the stock’s underperformance compared to a pure-play operator such as FMG, which has seen more significant margin gains on lowering costs and increased realised price as its iron ore grades have improved.
While iron ore prices are roughly 10% off their recent highs, this result demonstrates how cheap the big miners look if current commodity prices last for an extended period. RIO is set to generate roughly $20.00 of earnings per share which translates to a P/E multiple of approximately seven times. For the most part, RIO has been underperforming the $AUD iron ore price as most investors expect those prices to revert to long-term levels in the near term. Still, the recent pullback in the iron ore price hasn’t stopped RIO (or FMG) from surging to all-time highs, so it’s starting to feel that investors are pricing in a robust environment for longer. The hope is that this trend continues, and we see RIO reach new heights. RIO remains a hold as part of the Blue Chip strategy.
