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The latest dividend forecast for Rio Tinto (LSE: RIO) recommends this FTSE 100 heavy weight can still be a good source of income, despite the 50% dividend cut last year.
Here, I’ll take a look at Rio’s dividend and explain why I can’t buy the stock, even if the forecast is tempting.
Rio Tinto: dividend forecast
Here are the latest dividend estimates for Rio Tinto, based on broker forecasts:
| Dividends per share | Dividend yield | |
| 2023 | $4.67 | 6.8% |
| 2024 | $4.39 | 6.5% |
These numbers tell us that this big miner will generate more than 6% profit in the next few years.
It seems attractive, but I can not ignore the fact that the dividend is falling. Is this a warning sign of trouble ahead?
Why is Rio’s dividend down?
Rio Tinto is one of the biggest mining businesses in the world, but its profits are still tied to the price of iron ore. This steelmaking material is produced from a giant low-cost mine in Western Australia and accounts for around 80% of Rio’s profits.
In 2021, the price of iron ore rises to an all-time high. Rio’s profit for the year rose to $21.4bn, almost double the $12.4bn it reported for 2020.
This high price left the company with plenty of 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 will surely stop. Sure enough, Rio’s profits fell to $13 billion last year, as energy costs rose and commodity prices returned to more normal levels.
The 2022 dividend is reduced to reflect lower cash income. Shareholders received a dividend of $8bn, or $4.92 per share. Even with a 50% drop from 2021, this is still an impressive performance compared to any other year in the company’s history.
What stocks to buy?
City analysts seem to expect that commodity prices will continue to gradually level off. While Rio’s earnings are expected to decline again in 2023 and 2024, the forecast will be smaller.
Unfortunately, it is too soon to say whether the predictions are accurate. Commodity prices can change quickly. My experience is that it can be quite often, especially when market conditions change.
Much will depend on China’s economic strength – China is the world’s largest buyer of iron ore, supplying the construction and manufacturing industries.
My personal view is that Rio stock can still go lower. Mining is a cyclical business, but profits are still at historic highs. The company’s management is also looking for new growth opportunities, which may require initial 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 be better opportunities to buy this stock in the next year or two.
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