FTSE higher on hopes for de-escalation in Ukraine, Rio Tinto declares bumper dividend, and Barclays beats expectations

“The FTSE 100 managed a move higher on Wednesday despite the simmering tensions in Ukraine,” says AJ Bell Investment Director Russ Mould.

“The US seems to have ruled out any talks with the Russians until they pull back from the separatist regions in the Donbas region they occupied yesterday so the ball now appears to be in Vladimir Putin’s court.

“So far the sanctions imposed by the West aren’t as heavy as might have been expected and the market is apparently taking this a win amid hints Putin might be open to a diplomatic solution.

“However, predicting the Russian premier’s next move is a mug’s game and unfortunately until the situation is resolved the markets are likely to remain firmly on the edge.

“They could do with a spy of James Bond vintage to decipher the mixed messages coming from the Kremlin and 007’s favourite car maker Aston Martin revved higher as the company managed to cut its losses by three quarters and signalled its electric vehicle ambitions.

“After a troubled start to life as a public company since listing in 2018 the business might finally be getting back on track.”

Rio Tinto

“A decade ago, when commodities prices started to go into a long decline, mining companies had to take a long hard look at how they spent and made money.

“The ‘growth at any price’ acquisition spree came to a crashing halt and the strategy shifted to streamlining assets and operations and paying down debt. To keep shareholders happy, dividends became more important as investors were effectively paid to wait for the next commodity boom.

“Fast forward to the present and we’ve seen a continued absence of mega deals which came to haunt the sector, yet commodity prices have greatly improved. That has given the sector’s earnings a massive boost and enriched investors through an ever-growing stream of dividends, as illustrated by Rio Tinto’s bumper payday for its shareholders.

“Rio Tinto’s headline grabbing $16.8 billion total dividend payment for 2021 tops the $15.7 billion in dividends paid by Shell in 2018. That’s very impressive and is even greater than the approximate $14.5 billion Apple is paying annually in dividends based on its current quarterly run-rate.

“However, Rio’s figure is flattered by a ‘special’ dividend which is a one-off payment to reflect exceptional circumstances. It has enjoyed very strong earnings thanks to record iron ore prices last year, and from strong demand for aluminium and copper.

“The big question now is whether Rio’s dividends and earnings have peaked in the current commodities cycle. There are plenty of headwinds to suggest global economic growth may slow and forecasts would suggest Rio’s dividends are going to get progressively smaller over the next three years, though that is no doubt a reflection of special dividends being less generous and then not happening at all as it reverts to only paying ordinary dividends.

“The other point to consider is whether Rio is getting itchy to do a mega deal. Miners have been surprisingly restrained with acquisitions, but history would suggest the point at which everything is looking rosy is exactly when they go on a spending spree. They risk buying assets at the top of the market and them lamenting the disappointing returns in subsequent years.”

Barclays

“Unlike NatWest and HSBC where news of upgrades and share buybacks were cancelled out by other negative factors, Barclays seems to have won the market over with its better-than-expected performance and promised shareholder returns, which were larger than the market anticipated.

“There may also be an element of catch up at play given Barclays has been lapped like a 10,000-metre runner who’s run out of puff in recent months by its peers.

“These results represent a decent start for chief executive CS Venkatakrishnan, having taken over from his controversial predecessor Jes Staley last November.

“There will be a further change in the senior management team imminently with finance chief Tushar Mozaria, a well-regarded industry figure, retiring in April. However, the handover to his deputy Anna Cross should ensure this is a relatively straightforward transition.

“Unlike most of its peers, Barclays has a meaningful investment banking operation, and this was a big contributor to its stronger performance in 2021. However, the recent market volatility could impact that part of the business and stall its recent momentum in 2022.

“Higher interest rates should be beneficial, allowing Barclays to boost the amount it charges for loans and credit cards, although it will need to be mindful of the risks of rising bad debt amid the current cost of living crisis.

“Lower levels of credit impairments contributed to Barclays beating expectations this time, but this trend could easily turn and become a headwind for the business in the future.”

These articles are for information purposes only and are not a personal recommendation or advice.