Rio Tinto shares have plummeted by more than 8 per cent in London after the miner said dividends will fall in future years.
The company has abandoned its "progressive" dividend policy, which guaranteed that dividends never fall, and will instead try to return between 40 and 60 per cent of underlying earnings over the longer term.
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Rio Tinto flinches amid commodities pain
Global miner Rio Tinto has posted its worst underlying earnings in 11 years and scrapped a generous payout policy in the face of a bleak outlook for the global economy.
In the first hour of trading in London, about $6 billion of value has been wiped off the stock.
Rio said the move was designed to protect its balance sheet from the current market turmoil and to ensure it was not constrained by its own dividend policy, in a hint at possible acquisitions.
Rio vowed the 2016 dividend will not be less than $US1.10 a share. If held at $US1.10, the 2016 dividend will be the lowest since the $US1.08 a share dividend in 2010.
The change to the dividend policy came after Rio posted an underlying full-year profit of $US4.5 billion ($6.35 billion), which is its lowest underlying profit since posting a $US6.3 billion underlying loss in 2009.
The net result was a loss of $US866 million after taking into account $US3.3 billion of non-cash exchange rate and derivative losses, plus $US1.8 billion worth of asset impairments.
Declining profits were expected after prices for most of Rio's products, particularly iron ore, copper, aluminium and alumina trended lower during 2015.
Analyst consensus was for a $US4.57 billion underlying profit.
Shareholders will receive a $US2.15 a share franked dividend. RBC had expected a $US2.27 dividend, while Morgans has expected $2.17.
Rio chairman Jan du Plessis explained the dividend policy change, which is designed to ensure shareholders receive 40 to 60 per cent of underlying earnings over the long-term, rather than be guaranteed a certain amount each year.
"With the continuing uncertain market outlook, the board believes that maintaining the current progressive dividend policy would constrain the business and act against shareholders' long-term interests," he said.
"We are therefore replacing the progressive dividend policy with a more flexible approach that will allow the distribution of returns to reflect better the company's position and outlook.
"For 2016, we intend that the full year dividend will not be less than 110 US cents per share."
Morgans analyst Adrian Prendergast said the dividend change was reasonable in the current climate.
"This range is likely to be driven by Rio's desire to keep its dividend above a minimum of $US1.10; equivalent to a minimum dividend yield of at least 3.8 per cent fully franked," he said.
"We consider this to be a reasonable move, freeing up significant capital."
While largely explained as a reaction to weak market conditions, Rio chief financial officer Chris Lynch hinted it could also free the miner to make an acquisition while asset prices are low.
Rio is interested in buying copper assets, and chief executive Sam Walsh said he expected mid-cap companies to endure further balance sheet pressure during 2016, which could see more assets put on the market.
But Mr Walsh said there was no particular asset currently in the shop window that he was interested in.
The change to the dividend policy comes after an 18-month period of "materially increased shareholder returns" where the dividend rose 12 per cent and the company spent $US2 billion on share buybacks.
It was just 15 months ago that Mr Walsh said he was committed to raising dividends for the next five years.
"Looking out over the next five years, we expect to generate strong free cash flow and we remain committed to materially increase cash returns to shareholders in a sustainable way," he said in November 2014.
Rio's balance sheet was bolstered over the past 12 months by the fact it continued to sell assets, such as the Bengalla coal mine in NSW, which was sold to New Hope for $US606 million in September.
The Simandou iron ore project in the Ebola-ravaged nation of Guinea wore the largest impairment at $US1.11 billion. Smaller impairments were recorded against the Roughrider uranium deposit which was purchased in a bidding war in late 2011, and its stake in the struggling Australian uranium producer Energy Resources of Australia.
Continuing a cost reduction drive that has been under way for close to four years now, Rio vowed to cut $US1 billion from its cost base in both 2016 and 2017.
The company aims to keep its gearing ratio between 20 and 30 per cent longer term.
Rio shares closed 52 cents lower at $40.99 on Thursday.