Are BHP Billiton plc And Rio Tinto plc In Line To Become FTSE Dividend Champions?

BHP Billiton plc (LON: BLT) and Rio Tinto plc (LON: RIO) are eager to please investors with bigger dividends.

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rio tinto

Despite being two of the world’s largest mining companies, BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) have struggled to impress the market during the past few years. However, these miners have now got their act together and are trying to rebuild their image by slashing capital spending and cutting costs.

As a result, profits are rising and debt is falling, leading some City analysts to speculate that higher shareholder returns could be on the cards.

Plenty of cash to go around

One of the biggest problems these miners have faced in recent years is the fact that capital spending to develop new mines has exceeded that of cash generated from operations.

But this is now starting to change. Indeed, BHP recently reported that cash generated from operations during the first half of the company’s financial year increased 65% from the year before. This jump in cash generation is a result of £3bn worth of cost cutting, allowing the company to reduce net debt and fund expansion projects from cash flow. 

Retuning to profit

While BHP is now throwing out cash, peer Rio has surged back into the black after reporting a $3bn loss last year. Rio’s management has been aggressively cutting costs, slashing operating costs by $2.3bn (15% more than planned) during 2013 and a further $3bn of cuts is planned this year. Additionally, Rio’s management has scaled back capital spending, which fell by 26% last year.

Further, Rio has been selling underperforming assets, but only at the right price — management refuse to commit to a fire sale, only selling when they get the deal they want. Overall, this has been great news for Rio’s balance sheet as the company has been able to pay down $1.1bn of debt during 2013. The company plans further debt reduction this year to the tune of $3bn to $5bn. 

Prepare for payouts

As Rio returns to profit and BHP’s cash flow jumps, these miners are eager to return more cash to embattled investors who have put up with lacklustre returns during the past two years.

Thanks to its stellar performance last year Rio has already increased its dividend payout 15% for this year. However, City analyst believe that this is only a taster of things to come and Rio’s real payout increase will come next year, as the company concentrates on debt reduction this year. 

Actually, according to my figures Rio has plenty of room for further payout increases. In particular, on a cash basis during 2013 Rio generated $15bn from operations, spent $11bn on capital projects and only paid out $3.3bn in dividends. With the company’s capital spending expected to drop further this year, the company will have more cash available for the dividend.

And BHP also has plenty of room for further dividend increases according to my data. BHP generated $12bn in cash from operations during the first half of the company’s financial year for 2014. From this $12bn BHP spent $8.4bn on capital projects and $3.2bn on dividends, leaving room for growth if the company’s capital budget falls further.

Summary

So all in all, as BHP and Rio both cut costs, spending and debt further it is likely that investors will see fatter dividend payouts from these two industry behemoths.   

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert does not own any share mentioned within this article. 

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