Will a falling iron ore price weigh on RIO and FMG dividends?

Shares in the top iron ore miners have edged 4-8% lower over the last six months.

The top mining stocks are again in focus ahead of Rio Tinto’s (ASX: RIO) half year earnings report after market hours on Wednesday.

Shares in the company were down 1.2% to $97.78, while rivals Fortescue Metals Group (ASX: FMG) and BHP (ASX: BHP) were down 1.8% and 1.2% respectively.

What is weighing down sentiment in the RIO and FMG stock prices

Investors are nervous as they face up to the reality that a repeat of record profits from iron ore miners is quite unlikely, which will also impact how much dividends are paid out in coming months.

Analyst estimates indicate that BHP’s earnings could still be higher, thanks to its exposure to other commodities such as coal, whose prices have rocketed amid the Ukraine conflict.

But Rio, the world’s biggest iron ore producer, is expected to report a 30% drop in first-half earnings, while Fortescue’s annual profit could slide by up to 40% when it reports results next month.

The key factor contributing to this is the persistent decline in iron ore prices in recent months. The steel-making commodity currently trades around $US105 per tonne and has now lost more than a third of its value over the last two months amid uncertainty over demand as major economies drift towards recession.

On top of that, soaring costs and a tight labour market are set to weigh significantly on earnings of the top Australian miners.

In its quarterly production report earlier this month, Rio Tinto confirmed that it was facing labour shortages in Western Australia and warned that rising inflation would impact its underlying earnings in the second half, even as prices are on the decline.

Shrinking dividends

A sharp rebound in iron ore prices helped the top miners expand profits and shareholder returns in 2021, but a resurgence of COVID-19 restrictions by top customer China as well as a deepening crisis in that country’s real estate sector is weighing heavily on the outlook this year.

The resulting lower earnings are expected to lead to reduced returns for investors, given that payout ratios typically target a percentage of free cash flow paid out to shareholders, according to UBS analysts.

That could mean that the special dividends that Rio Tinto shareholders have received over the last 18 months may have come to an end.

Goldman Sachs analysts are similarly betting that Fortescue’s FY2022 dividend will be around half the fully franked $3.58 per share that it paid last year.

The broker is tipping for the iron ore price to head below $US100 a tonne because there will be a “significant surplus” of iron ore supply in the second half of this calendar year.

UBS analyst Lachlan Shaw last week cut his price target for BHP shares by 7% and reduced his FY2023 earnings estimate for the miner by 9% and FY24 earnings estimate by 23%.

Considering buying RIO, BHP or FMG shares?

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