Rio Tinto announces share buy-back program

Rio Tinto (LON: RIO) says it plans to buy back shares worth about US$3.2 billion.

The funds were generated from the sale of coal assets and a smelter.

Rio has completed the sale of Hail Creek and Valeria for US$1.7 billion, Winchester South for US$0.2 billion, and Kestrel for US$2.25 billion (all pre-tax), in addition to its Dunkerque aluminium smelter in northern France for US$500 million.

The latest share buy-back plan is on top of the company’s existing buy-back programs, of which US$1.7 billion in shares remain to be purchased and which will be completed before the end of February 2019.

“On top of the existing buyback and forecast dividend, this takes the theoretical total shareholder returns to 12.3% for 2018,” Edward Sterck of BMO Capital Markets comments in a research note to clients, adding that the additional buyback is not evenly split, with 60% on the ASX and the rest on the London Stock Exchange.

Sterck forecasts a 2018 dividend of US$4 billion for a yield of about 4.9%.

“Including the share buybacks announced previously, this new share buyback takes the theoretical 2018 shareholder return to 12.3% of Rio Tinto’s market value,” he states. “On our estimate, the total theoretical 2019 shareholder return would increase to 6.3% (from 5.3% before today’s announcement; 5% from dividends and 1.3% from share buyback).”

The company remains Sterck’s favourite pick among the diversified miners.

“This announcement only cements that view, with the implied shareholder return of 12.3% being well ahead of its peers,” he writes. “However, we also note that Rio Tinto’s current strategy of selling EBITDA to fund shareholder returns can only continue for so long and that the company may have to look at other options to drive value, including possible M&A.”