Rio Tinto plc Set For 17% Dividend Growth

We all know that the mining sector has been through a tough patch — in addition to its usual cyclical nature, the business has been hit by a slowdown in Chinese growth, and a few miners found themselves stuck with over-production.

rio tintoRio Tinto (LSE: RIO) (NYSE: RIO.US) had a tough year in 2009, when earnings slumped and the company was forced to slash its dividend. But since then, the annual cash handout has been powering back. In 2013 shareholders enjoyed a 3.3% yield, and we have more growth forecast for the next two years.

In fact, by December 2015 the dividend is predicted to rise by 17% over 2013’s figure, and that would provide a yield of 3.8% for this year and 4.1% next, based on today’s share price of 3,218p.

Shares are cheap

The share price itself doesn’t look too stretching, with a forward P/E of just 10 for 2014, dropping to under nine for 2015. Shares offering such high dividends are rarely on such a low P/E rating compared to the FTSE’s long-term average of 14, but it’s likely that fears surrounding the overheating Chinese credit and property markets are creating some drag.

But the price has actually been doing well of late, gaining 10% over the past 12 months against just 6% for the FTSE 100, and today’s still-low rating suggests there’s plenty more to come.

The City’s analysts certainly seem to think so — 18 out of a sample of 27 have Rio Tinto’s shares on a Strong Buy rating, with a further two suggesting Buy. In the bearish camp, two forecasts are currently sitting on a Strong Sell recommendation, with the remaining five urging us to Hold.

Bullish outlook

ThumbUp1I’ve rarely seen a more bullish consensus outlook on a share than this, and I’m with it all the way. I added Rio Tinto to the Fool’s Beginners’ Portfolio back in August 2012 at a price of 3,048p. My timing wasn’t great, with the price heading for a rocky patch — but with a price gain of 5.6% and a further 5.9% so far in dividends, I’m happy.

Will these forecasts come true? There are still risks, but April’s Q1 update from Rio looked good. We heard of record first-quarter production of iron ore (and iron accounts for almost half of the company’s annual turnover), with shipments going strong too — so at the moment, there shouldn’t be any fears of over-production.

Commodity prices fragile

The only downside I see at the moment is that world iron ore prices have been slipping back a bit in the last few months, though we’re still ahead of 2012’s low.

Finally, if you're looking for a hot share that's set for even better growth than Rio Tinto, look no further than the Motley Fool's BRAND-NEW "Top Growth Stock For 2014" report. It's a smaller-cap stock, but they're the ones with most room to grow -- and its earnings and dividends have been powering up nicely!

To find out more, just click here for your personal copy of the report while it's still available.

Alan does not own any shares in Rio Tinto.