How Strong Are Rio Tinto plc’s Dividends?

Rio TintoThe Rio Tinto (LSE: RIO) (NYSE: RIO.US) share price has not exactly put in a stellar performance over the past few years.

No sooner had it picked up from the 2009 stock market slump, than a slowdown in Chinese growth led to an oversupply of metals and minerals, world prices for the various precious dirts started to fall, and mining stocks started to slide back down again.

Share price slump

Over the past three years the price of Rio Tinto shares has dropped by 28% while the FTSE 100 has put on 18%, so those who bought back in 2011 looking to profit from the world’s economic recovery will be a bit disappointed by the way things have gone.

But whatever you think of the share price, the dividends have been doing well of late.

The annual payment was slashed in the crunch year of 2009, and the 45 cents per share that year amounted to a yield of less than 1%. But since then the cash has been steadily increasing, with 108 cents paid out the following year — all the way up to 192 cents in 2013, representing a yield of 3.3%.

Progressive dividend policy

Last year, the dividend was lifted by 15%, with chief executive Sam Walsh saying “The 15% increase in our dividend reflects our confidence in the business and its attractive prospects“. It was covered 2.9 times by earnings per share (EPS), and that looks like a pretty reasonable safety margin. The firm also told us that its “progressive dividend policy is to increase the US dollar value of ordinary dividends over time“.

For this year, forecasts suggest the dividend will rise by another 9%, but EPS is set to fall a little and so the the dividend cover would drop to around 2.5 times. But with a return to earnings growth suggested for 2015, we should see that cover firming up a little to 2.6 times.

Worth buying?

Are Rio Tinto shares cheap? I think so, which is why I added Rio to the Fool’s Beginners’ Portfolio. On a forward P/E of 10 for this year, dropping to 9 based on 2015 forecasts, the current price of 3,069p seems too low — even for a cyclical business, and even with world commodities prices looking like they’ll remain low for a little while yet.

I do think those dividends lend support to anyone buying now in the hope of a share price recovery — sitting back and taking 4% per year and better would suit me just fine while I’m waiting for that capital appreciation.

And the City’s analysts seem to agree — there’s a pretty big Strong Buy consensus at the moment.

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Alan does not own any shares in Rio Tinto.