Are Dividends From Rio Tinto plc, Anglo American plc & BHP Billiton plc Set For Big Cuts?

Dividends from Rio Tinto (LSE: RIO) have been growing steadily year-on-year, despite earnings per share (EPS) having fallen from more than $8 in 2011 to $5 in 2014. And with Chinese demand falling — annual growth has now slipped below the government’s 7% target — there’s no let-up on the cards.

In fact, there’s a further 48% fall in EPS predicted by the City this year, but despite that the dividend is set to rise again to yield 6.2% on a share price of 2,360p — and that would be covered by earnings less than 1.2 times, which seems dangerously low for a capital-intensive business.

Monster yields

There’s a forecast yield of 45.3p on the cards for Anglo American (LSE: AAL) at the moment, which would provide an even bigger yield of 8.4% on today’s share price of 537p — and I note that the price has lost 3.6% at the time of writing today, so confidence is diminishing again.

You might think such a high yield is good news, but EPS at the diversified miner (which produces around 40% of the world’s platinum) has fallen for three years in a row, and there’s a hefty 50% drop predicted for the current year. That would leave the mooted dividend less than 1.3 times covered by earnings.

If you think that level of cover is poor, the 6.5% yield paid by BHP Billiton (LSE: BLT) last year wasn’t even covered, with EPS only accounting for 97% of it. And things look worse this year, with a 50% crash in earnings and no cut to the dividend forecast, leaving the predicted payout at a level of more than twice earnings. On top of that, Rio is also engaged in a share buyback programme!

Rio has been offloading some assets, but at the interim stage it reported a net debt position of $13.7bn, and I find it hard to understand a company with falling earnings handing out more and more cash in that state.

It’s starting

Analysts are already starting to take note, and that 8.4% forecast for Anglo American represents a cut in the actual cash — and they have a further, but modest, drop penciled in for next year. I do see Anglo American as the biggest risk of these three, and I’ll be very surprised if the dividend is not slashed further current forecasts suggest.

I don’t see any quick acceleration in Chinese demand on the cards, and no early recovery in commodities prices. And with earnings falling across the sector, I can see a bowing to the inevitable and dividend cuts on the horizon. Glencore has already suspended its 2015 final dividend in an effort to reduce debt, and I think the others will be mad to continue to ignore reality if the crisis continues much longer — and dividend forecasts have been lowered over the past six months.

I still think we could be at a nadir for the mining industry right now and in a good period to buy — but I reckon investors would be foolhardy to rely on those dividends.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.