Rio Tinto: Improved Conditions Can Augur Well

The pickup in iron ore prices in H2 2023 worked well for the company, with net sales revenue up by 6.2% YoY during this time after a 10.4% contraction in H1 2023. But the real highlight was the 43.3% increase in net attributable income after a 42.8% decline in H1 2023.
While the full-year numbers were still impacted by a challenged H1 2023, the extent of decline reduced significantly. Net sales revenue fell to 3% and net attributable earnings fell by 19%.

With weaker earnings, the company also cut its dividends by ~12% during the year to USD 4.35. But here too, the extent of the cut declined from 34% in H1 2023. This results in a TTM dividend yield of 6.94%. Further, despite dividend cuts for the past two years straight, the yield on cost for investors who have held the stock for the past five years is robust at almost 10%. In other words, it’s still a good dividend stock to consider buying.

It’s disappointing though, that the iron ore price uptick has reversed YTD, resulting in a 17% decline in price since the start of 2024. However, it may still turn out to be positive for Rio Tinto. Here's why.
Last year, its realised iron ore price was already up 2% YoY to USD 108.4 per dry metric tonne. While the exact realised price can differ based on the category of the iron price most relevant to it, in general, the present iron ore price of USD 118 per tonne is still higher than that level. Further, ING forecasts that prices will stay at around these levels through the year, with their average for 2024 at USD 120 per tonne. This can reinforce the company's financials positively, since it expects a broadly similar iron ore production compared with last year (see table below).

While the potential for demand from China remains somewhat uncertain in the year ahead, going by the government’s slightly reduced forecasts for growth this year and weakness in other big markets too, how far the prices are impacted from here remains to be seen.

The stock’s market multiples have also moderated significantly since I last checked. The GAAP TTM P/E is now at 10.15x, which is below its past decade’s ratio of 11x and much lower than the 13.5x it was when I checked last. Also, the GAAP forward P/E at 6.85x is lower than the five-year average of 7.86x and also the past decade's average of 8.53x. The ratios are also significantly lower than the median levels for the materials sector (see table below).