Dividends from Rio Tinto (LSE: RIO) have been growing steadily year-on-year, despite earnings per share (EPS) having fallen from more than $8 in 2011 to $5 in 2014. And with Chinese demand falling — annual growth has now slipped below the government’s 7% target — there’s no let-up on the cards.
In fact, there’s a further 48% fall in EPS predicted by the City this year, but despite that the dividend is set to rise again to yield 6.2% on a share price of 2,360p — and that would be covered by earnings less than 1.2 times, which seems dangerously low for a capital-intensive business.
Monster yields
There’s a forecast yield of 45.3p on the cards for Anglo American (LSE: AAL) at the moment, which would provide an even bigger yield of 8.4% on today’s share price of 537p — and I note that the price has lost 3.6% at the time of writing today, so confidence is diminishing again.
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You might think such a high yield is good news, but EPS at the diversified miner (which produces around 40% of the world’s platinum) has fallen for three years in a row, and there’s a hefty 50% drop predicted for the current year. That would leave the mooted dividend less than 1.3 times covered by earnings.
If you think that level of cover is poor, the 6.5% yield paid by BHP Billiton (LSE: BLT) last year wasn’t even covered, with EPS only accounting for 97% of it. And things look worse this year, with a 50% crash in earnings and no cut to the dividend forecast, leaving the predicted payout at a level of more than twice earnings. On top of that, Rio is also engaged in a share buyback programme!
Rio has been offloading some assets, but at the interim stage it reported a net debt position of $13.7bn, and I find it hard to understand a company with falling earnings handing out more and more cash in that state.
It’s starting
Analysts are already starting to take note, and that 8.4% forecast for Anglo American represents a cut in the actual cash — and they have a further, but modest, drop penciled in for next year. I do see Anglo American as the biggest risk of these three, and I’ll be very surprised if the dividend is not slashed further current forecasts suggest.
I don’t see any quick acceleration in Chinese demand on the cards, and no early recovery in commodities prices. And with earnings falling across the sector, I can see a bowing to the inevitable and dividend cuts on the horizon. Glencore has already suspended its 2015 final dividend in an effort to reduce debt, and I think the others will be mad to continue to ignore reality if the crisis continues much longer — and dividend forecasts have been lowered over the past six months.
I still think we could be at a nadir for the mining industry right now and in a good period to buy — but I reckon investors would be foolhardy to rely on those dividends.
