Rio Tinto "Likely" to Cut Dividend

Rio exemplifies the danger of high levels of investment during a boom and has destroyed its cost advantages, particularly in iron ore, say Morningstar equity analysts

Morningstar Equity Analysts 20 January, 2016 | 3:39PM
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Equity analysts think it's both prudent and likely Rio Tinto (RIO) will cut its dividend given shrinking free cash flow. We now forecast flat dividends of $1.40 per share from 2016, down from 2014's $2.15 per share peak and our most recent forecast of $1.80 per year.

Falling commodity prices will be the arbiter of dividends, not management's will. This cut would see Rio Tinto generate total free cash flow after dividends of approximately $4 billion for the three years ended 2017. It is prudent some debt is repaid as financial leverage magnifies the impact of lower commodity prices on the value of the shares. Rio's balance sheet is only sound.

Destroyed Cost Advantages

The unchanged no moat rating reflects over-investment during the boom. Rio exemplifies the danger of high levels of investment during a boom and has destroyed its cost advantages, particularly in iron ore, by investing in high priced assets at the peak of the cycle. Our unchanged high fair value uncertainty rating reflects Rio’s operating leverage, cyclicality and reliance on iron ore.

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