Prolonged commodity price weakness has brought progressive dividend schemes across the mining industry crashing down in recent times.
Diversified diggers Glencore and Anglo American have been notable casualties in this regard, and fellow FTSE 100 (INDEXFTSE: UKX) giant Rio Tinto (LSE: RIO) is the next in line to disappoint income investors.
Rio Tinto locked the full-year dividend at 215 US cents per share for 2015 back in February, the mining giant commenting that “the continuing uncertain market outlook [means] that maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests.”
Rio Tinto did vow to pay a dividend of at least 110 cents for 2016, however.bAnd the City expects Rio Tinto to make good on this pledge, the number crunchers having pencilled-in a 115 cent reward for the period, yielding a chunky 3.5%.
Still, this would be covered just 1.6 times by projected earnings, well below the widely-regarded ‘safety’ benchmark of 2 times. And Rio Tinto’s dividend of 45 cents for the first half — down 58% from the same 2015 period — has cast some to doubt its earlier promise.
The metals giant remains locked on a course of asset-shedding to soothe its colossal $12.9bn net debt pile and pay chunky dividends. Just last Friday Rio Tinto completed the sale of its Mount Isa iron ore assets in Australia, taking total divestments since January 2013 to $4.7bn.
But these measures are nothing more than a near-term sticking plaster as raw material values continue to drag. And with China’s economy steadily cooling, and major producers hiking output across commodity classes, I reckon Rio Tinto is in danger of delivering disappointing dividends this year and beyond.
Stable… for the time being
Banking giant HSBC (LSE: HSBA) soothed concerns over its own payout prospects with this week’s half-year release. The company’s financial strength has been given a boost by the sale of its Brazilian banking operations, a move that prompted HSBC to launch a $2.5bn share buyback scheme.
The bank also noted that its CET1 ratio improved to 12.1% as of June from 11.9% six months earlier. And it expects the divestment of its aforementioned South American unit to boost its capital ratio by an additional 0.7% in the third quarter.
The financial giant consequently reaffirmed its commitment “to sustain [the] annual ordinary dividend in respect of the year at current levels for the foreseeable future,” with the first two payments of 2016 matching those of 2015 at 20 US cents per share. Total payments last year rang in at 51 cents.
The City certainly expects HSBC to match last year’s dividend. And while this scenario may put the bank’s progressive policy to the sword, a market-busting 6.9% may be difficult to ignore. But ‘The World’s Local Bank’ isn’t out of the woods just yet. The company continues to suffer from chronic revenues pressure as emerging markets in Asia cool, and pre-tax profits slumped 29% during January-June, to $9.7bn.
And HSBC this week commented on the severe volatility and uncertainty that has accompanied Britain’s decision to leave the EU, a problem “likely to continue for some time.”
The prospect of a prolonged UK withdrawal, and consequent impact on global growth, could have serious ramifications for HSBC looking ahead. For one, recent European Banking Authority stress testing showed HSBC’s CET1 ratio falling to just 8.8% under ‘adverse’ economic conditions.
So while HSBC may appear in good stead to meet dividend forecasts for this year, I believe the bank’s dividend picture beyond 2016 may become less and less rosy.
