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The latest dividend forecasts for red river (LSE:RIO) suggest this FTSE 100 The heavyweight could still be a good earner, despite last year’s 50% dividend cut.
Here, I’ll take a closer look at Rio’s dividend and explain why you may not buy the stock yet, despite these tantalizing forecasts.
Rio Tinto: dividend forecast
Here are the latest dividend estimates for Rio Tinto, based on brokers’ forecasts:
dividend per share | dividend yield | |
2023 | $4.67 | 6.8% |
2024 | $4.39 | 6.5% |
These numbers tell me that this big miner is expected to provide a dividend yield of over 6% over the next two years.
That sounds attractive, but I can’t ignore the fact that the dividend is falling. Is this a warning sign of trouble to come?
Why does the Rio dividend fall?
Rio Tinto is one of the world’s largest mining companies, but its profits are still closely tied to the price of iron ore. This steelmaking ingredient is produced in giant low-cost mines in Western Australia and generates around 80% of Rio’s profits.
In 2021, iron ore prices reached all-time highs. Rio’s profit for the year rose to $21.4 billion, nearly double the $12.4 billion reported in 2020.
These high prices left the company with a lot of extra cash at the end of 2021. This allowed management to declare a record dividend of $16.8 billion, or $10.40 per share.
After a year like this, 2022 was always likely to be a disappointment. Sure enough, Rio’s profit fell to $13 billion last year as energy costs rose and commodity prices returned to more normal levels.
The 2022 dividend was reduced to reflect lower cash generation. Shareholders received a dividend of $8 billion, or $4.92 per share. Although that is a 50% drop from 2021, it was a very good performance compared to any other year in the company’s history.
Are shares a purchase?
Analysts in the city seem to expect commodity prices to continue to gradually stabilize. While Rio’s earnings are expected to fall again in 2023 and 2024, forecasts suggest it will be much less.
Unfortunately, it’s too early to say how accurate these forecasts will be. Commodity prices can change rapidly. My experience is that they can often be quite volatile, especially when market conditions change.
Much will depend on the strength of the Chinese economy: China is the world’s biggest buyer of iron ore, to supply its construction and manufacturing industries.
My personal opinion is that Rio shares could fall further. Mining is a cyclical business, but earnings are still at the high end of their historical range. Company management is also looking for new growth opportunities, which might require an upfront investment.
Overall, I don’t think Rio’s 6% yield is high enough to reflect the risk of a cyclical downturn and lower earnings. In my opinion, there will probably be better opportunities to buy these stocks over the next year or two.
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