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The Rio Tinto share price falls as profits decline. Should I buy the stock?

Asian man looking concerned while studying paperwork at his desk in an office
Image source: Getty Images

As I write, the Rio Tinto (LSE:RIO) share price is down 2% following the release of the FTSE 100 mining stalwart’s full-year results on 21 February.

Its share price fell 3.3% yesterday (20 February), making it the largest faller on the index for the day. After what’s been a slow start to the year for the stock, shareholders would have been hoping its 2023 results will provide it with an uplift.

But what’s next for Rio Tinto following the release? And should I be buying some shares? Let’s explore.

Profits decline

So, why has the market reacted negatively to its latest update?

Well, for 2023 the business reported underlying earnings of $11.8bn, a drop off from the $13.4bn reported in 2022.

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It also took a net impairment charge hit of $700m after tax. The business pinned this cost predominantly down to its alumina refineries in Queensland.

Rio Tinto also saw its underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) fall by $1.5bn to $23.9bn, largely due to lower prices for commodities. That said, it did come in ahead of analyst forecasts.

Although prices in iron ore rose, this was offset by lower pricing for copper, diamonds, and industrial minerals. While inflationary pressures continue to subside, Rio Tinto still felt some effects, largely in third-party costs.

A strong dividend

That’s clearly not good news. But does that mean I should be avoiding the stock?

Well, I like to target shares that provide a stable passive income. Naturally, with a 6.2% dividend yield, Rio Tinto has been on my watchlist for some time.

For the year, it announced a dividend of 435 cents per share, a 12% decline year over year. Despite the fall, that’s still a 60% payout, highlighting the firm’s strong balance sheet.

Speaking on the results, CEO Jakon Stausholm stated that Rio Tinto: “will continue paying attractive dividends and investing in the long-term strength of our business”.

Influenced by China

There is also the issue of China to consider. Rio Tinto operates in a highly cyclical industry. Growing nations such as China, and the performance of its economy, can heavily dictate its share price movements.

The stock’s decline yesterday was fuelled by the People’s Bank of China cutting its five-year loan prime rate by 25 basis points to 3.95%, a larger cut than what was expected. With the Chinese property market also being under pressure following recent wobbles, this could have an adverse impact on Rio Tinto’s performance.

Solid progress

But the business is making solid progress elsewhere.

For example, it alluded to the strides it has made with projects including its You Tolgoi underground copper mine in Mongolia, where it achieved its first sustainable production. It remains on track to produce 500,000 tonnes of copper per year from 2028 to 2036.

My move

Stausholm highlighted how Rio Tinto’s performance highlights the business’s resilient nature. And I agree.

However, I see better options out there for my portfolio at the moment. Its meaty yield is tempting, but I’ll be holding off from buying for now.

The post The Rio Tinto share price falls as profits decline. Should I buy the stock? appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024