Australia’s iron ore giants to lean conservative on dividends, analysts say

Iron ore prices averaging $120 a tonne and well above historical levels have supported profits this year for BHP, Rio Tinto and Fortescue.

Diversified miners BHP and Rio Tinto, which are reporting their half- and full-year results, respectively, are expected to report earnings flat to slightly lower, with Rio Tinto’s performance hurt by falling prices for aluminium.

“On average you’re looking for payout ratios to be slightly more conservative than in the recent past as their focus shifts from returns to growth,” analyst Glyn Lawcock of Barrenjoey said.

BHP’s dividend policy is to pay out a minimum of 50% of earnings each half, with analysts expecting the ratio to be closer to the 50% level this half.

“We expect BHP to be more conservative with the dividend payout, as its net debt has lifted towards the upper end of its target range following the OZ Minerals acquisition, capex is set to increase, and it faces the eventual Samarco settlement currently under negotiation,” UBS said.

BHP last week flagged $5.7 billion impairments linked to its Brazilian Samarco dam failure and its Western Australia Nickel business. It is also preparing to bring on line its Jansen pot ash project in Canada.

UBS expects BHP’s dividend may be “slightly conservative” at $0.66 vs consensus of $0.70

Rio Tinto
Rio Tinto is expected to declare a strong final dividend, but hold back on additional shareholder returns as it readies its joint Simandou iron ore project in Guinea and an expansion at its Oyu Tolgoi copper mine in Mongolia.

UBS expects Rio Tinto to announce a dividend of around $2.74, well ahead of consensus of $2.43, with a payout ratio of 69% given strong operational performance and realized prices, and low net debt.

Morgan Stanley expects Rio Tinto to hold back on special dividends.

“Despite Rio’s strong balance sheet … we do not see potential for further capital management from Rio given increasing growth capex plans, especially at Simandou and Oyu Tolgoi,” it said.

Fortescue
Analysts expect Fortescue to pay out between 60-70% of underlying net profit on strong iron ore prices and narrow discounts for its low grade 58% iron ore, as Chinese steel makers turn to cheaper ore to preserve margins.

Fortescue’s policy is of paying out 50-80% of underlying net profit after tax. Analysts see risks to the payout rate as the miner spends on its energy division.

Consensus estimate for Fortescue’s dividend is 67.8 cents, 63% of its payout ratio.

BHP reports on Feb. 20, Rio Tinto on Feb. 21 and Fortescue on Feb 22.