Iron ore floods Rio Tinto with cash
Rio Tinto could unleash a dividend bonanza to wash away memories of its poor first-half operating performance, analysts say.
Rio Tinto could unleash a dividend bonanza to wash away memories of its poor first-half operating performance, analysts say, as high iron ore prices deliver a flood of free cash into the company’s coffers.
Rio will deliver its half-year results this afternoon, and analyst consensus puts its first-half dividend at about $US1.78 ($2.58) a share. But despite two downwards revisions of output from its Pilbara iron ore operations this year, the strong iron ore price could still lead to extra payments from the global mining major.
Rio has already returned $US8.2 billion to shareholders in the form of dividends and buybacks, and the company’s dividend policy is to pay between 40 and 60 per cent of earnings.
But with major shareholder Chinalco approaching the maximum 15 per cent stake in Rio mandated by the Australian government, and having already pushed back against extensions of Rio’s buyback program at its annual shareholder meeting, analysts say a special dividend is possible in the first half.
Macquarie analysts are tipping first-half earnings, before interest, tax, depreciation and amortisation, of $US10.9 billion, with iron ore likely to make up more than 80 per cent of earnings for the half.
In a client note this week Macquarie says it expects Rio to post after-tax earnings of $US5.7bn, and to pay out half of that in a $US1.76 interim dividend. UBS analyst Glynn Lawcock said he expects a below-consensus dividend of $US1.56 a share. But both Macquarie and UBS say there is a real prospect Rio could declare an additional special dividend as the cash rolls in from its iron ore division.
“After paying our forecast $US2.8bn interim dividend, Rio’s net debt will have increased to $US5.1bn, suggesting there is some scope for an additional $US1bn in cash returns,” the Macquarie note says.
“There is upside risk to dividend with a potential for up to US60c ($US1bn) in special dividend. This would increase net debt to $US6bn, which we believe is the upper end of Rio’s acceptable net debt band.”
Mr Lawcock also flagged the potential for a special dividend from Rio, saying the company could hold to its history of paying out half of earnings in the first half, weighting dividends to the full year, but such a move “would not be well received, in our view”.
“Given our estimated free cash from in the first half of 2019 of $US4.4bn ($US2.67 per share), Rio could return a further $US1.11 on top of the interim dividend.”