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What Are Rio Tinto plc’s Dividend Prospects Like Beyond 2014?

Today I am looking at mining colossus Rio Tinto‘s (LSE: RIO) (NYSE: RIO.US) dividend outlook past 2014.

Poor commodity markets threaten dividends

Rio Tinto’s operational update last week underlined the excellent progress the firm is making in creating a more efficient, earnings-generating vehicle. While iron ore, bauxite and thermal coal output all hit record highs last year, operating cash costs continued to plummet — these fell by $2bn in 2013 from 2012 levels — and capital expenditure also dropped dramatically.

City analysts expect this transformation programme to help the firm bounce back from the hefty 38% earnings decline punched in 2012. Current projections are for the mining firm to post a modest 1% improvement last year, with earnings expected to stream 14% and 13% higher in 2014 and 2015 respectively.

As a consequence, Rio Tinto is predicted to keep its progressive dividend policy on track throughout the period, and brokers expect the firm to increase the full-year payout 8.8% for 2013 to 181.7 US cents per share. An additional 6.4% increase is anticipated for 2014, to 193.3 cents, with a further 7.8% rise pencilled in for next year, to 208.4 cents.

Despite these hefty dividend projections, however, the expected payment for last year merely brings it up to scratch with that of the wider market — the FTSE 100 currently sports an average forward yield of 3.2% compared with Rio Tinto’s corresponding reading of 3.5%. The firm’s carries yields of 3.7% and 4% for this year and next.

The company was forced to cut the dividend by a colossal 60% in 2009 as the effect of collapsing commodity prices drove earnings through the floor. And although Rio Tinto boasts supreme dividend cover through 2015 — a reading of 3.1 prospective earnings for this year and next soars above the security benchmark of 2 times — the strong possibility of worsening commodity markets could once again deliver a hammerblow to shareholder payouts.

Indeed, Bank of America notes that in the iron ore market alone — responsible for 99% of Rio Tinto’s underlying earnings — a backdrop of “supply additions should make themselves increasingly felt,” and forecasts an average price in 2014 of $120 per tonne versus around $135 presently. The broker also expects a deteriorating supply/demand in other key markets to pressure prices, with copper anticipated to average $7,013 per tonne this year, down from $7,380 currently.

Although Rio Tinto’s operational overhaul has undoubtedly made stunning progress, in my opinion a worsening picture for commodity prices continues to overshadow this. I expect earnings and dividend expansion to experience accelerating pressure as a consequence. Meanwhile, Rio Tinto’s ongoing divestment scheme is also likely to weigh on growth potential over the long-term.

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> Royston does not own shares in Rio Tinto.