The latest dividend forecasts for Rio Tinto (LSE: RIO) suggest this FTSE 100 heavyweight could still be a good source of income, despite last year’s 50% dividend cut.
Here, I’ll take a closer look at Rio’s dividend and explain why I might not buy the shares yet, despite these tempting forecasts.
Rio Tinto: dividend forecasts
Here are the latest dividend estimates for Rio Tinto, based on broker forecasts:
| Dividend per share | Dividend yield | |
| 2023 | $4.67 | 6.8% |
| 2024 | $4.39 | 6.5% |
These numbers tell me this big miner is expected to provide a dividend yield of more than 6% over the next couple of years.
That seems attractive, but I can’t ignore the fact the dividend is falling. Is this a warning sign of problems ahead?
Why is Rio’s dividend falling?
Rio Tinto is one of the biggest mining businesses in the world, but its profits are still closely tied to the price of iron ore. This steelmaking ingredient is produced from giant low-cost mines in Western Australia and generates around 80% of Rio’s profits.
In 2021, iron ore prices spiked to all-time highs. Rio’s profits for the year rose to $21.4bn, almost double the $12.4bn reported in 2020.
These high prices left the company with a lot of spare cash at the end of 2021. This allowed management to declare a record dividend of $16.8bn, or $10.40 per share.
After a year like this, 2022 was always likely to be a let-down. Sure enough, Rio’s profits fell to $13bn last year, as energy costs rose and commodity prices returned to more normal levels.
The 2022 dividend was scaled back to reflect lower cash generation. Shareholders received an $8bn dividend, or $4.92 per share. Although that’s a 50% drop from 2021, it was still a very good performance compared to any other year in the company’s history.
Are the shares a buy?
City analysts seem to expect that commodity prices will continue to gradually level off. While Rio’s earnings are expected to fall again in 2023 and 2024, forecasts suggest it will be much smaller.
Unfortunately, it’s too soon to say how accurate these forecasts will be. Commodity prices can change quickly. My experience is that they can often be quite volatile, especially when market conditions change.
A lot 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 view is that Rio shares could still have further to fall. Mining is a cyclical business, but profits are still at the top end of their historic range. The company’s management is also looking for new growth opportunities, which might require upfront investment.
On balance, I don’t think Rio’s 6% yield is high enough to reflect the risk of a cyclical downturn and lower profits. In my view, there will probably be better opportunities to buy this stock over the next year or two.
