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Rio Tinto Digs For Dollars

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 2:35PM

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Global mineral conglomerate rides the tide of higher worldwide commodity demand.

If it's found in the ground and mankind values it, odds are good that Rio Tinto (NYSE:RTP) digs it up and sells it.

An integrated producer of copper, aluminum, iron, coal, diamonds, and a host of other items mined, pumped, or otherwise wrenched from the earth, Rio Tinto posted strong growth on the back of higher global pricing for these commodities.

Total revenue grew by 23% for the year, and every business segment posted growth. Copper and iron ore remained the biggest contributors to total performance, but growth in segments such as aluminum, energy, and diamonds were all very robust. All of this growth translated into more than $2.2 billion in free cash flow -- some 17% more than last year.

Despite spending on new mines for diamonds, copper, and iron, the cash flooding into the company's coffers exceeds its needs. Consequently, management has initiated a plan to return capital to shareholders. In addition to a 20% increase in the dividend, Rio Tinto will launch a $1.5 billion share buyback.

While it might sound petty to bicker with such a huge return of cash, this Fool questions the choice of share buyback as opposed to a special dividend. Though it's true that share buybacks can boost the price of the stock, the benefit to long-term shareholders is somewhat questionable. You, as an investor, might feel better off because your Rio Tinto shares are up a few bucks, but you can't go spend that wealth unless you sell the shares. With a special dividend, though, you get cash in your hand and don't have to sell any shares to benefit.

This quibble aside, there is much to like about Rio Tinto. Management believes that prices are clearly still rising and they are actively building up new projects. That said, management acknowledged that the "market is good, but not easy." The same shortages and demands that have pushed up prices for commodities like copper and iron are pushing up production costs for those like Rio Tinto who mine and refine those materials.

While commodity prices will eventually peak, no one knows for sure when a peak has been reached until they look back in time. With strong global demand still in place, there could be a bit more room for prices to run. Fools who wish to have a broad exposure to a wide range of different commodities might do well to take a look at Rio Tinto shares.

Management made a statement during the conference call that I believe makes for an excellent coda: "We are in business to invest in profitable opportunities that create value for shareholders." Now, if only all CEOs took that to heart.

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.

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