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Rio Tinto shares suffering from confirmation of commodity sector woes this morning. Shareholders are reacting unfavourably, maybe even a little unfairly, to a far from unexpected change to dividend policy after a 51% decline in FY earnings and a downbeat outlook – 2016 is set to be even tougher. Management ditching its progressive and currently generous income offering due to the tough outlook for the global economy, however, makes sense. Realigning investor income with ‘real world’ cash-flows, and thus offering no guarantees given the cloudy outlook, is prudent to ensure long-term investor returns (along with CAPEX reduction and cost cutting), even if it damages the share price short-term. Certain Oil major CEOs banking on a simple rebound in the price of a barrel might do well to take a few spoonfuls of the same medicine or at least go and see the same doctor. Short-term pain for long-term gain. It’s a new world we live in. No use staring in the rear-view mirror.
Mike van Dulken, Head of Research
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