Is Rio Tinto Limited’s dividend in doubt?

Is Rio Tinto Limited’s (ASX: RIO) dividend in doubt? Yes.

Could Rio Tinto continue its progressive dividend policy in 2016? Yes.

Should Rio Tinto pay a larger dividend? That’s a tough question to answer.

Many pundits are calling on Rio Tinto, the world’s second-largest iron ore producer, to cut its dividend in a bid to conserve cash in the face of prolonged falls in commodity prices. However, that doesn’t mean it will.

Indeed, significant falls in iron ore prices saw Vale SA, the world’s largest iron ore miner, recommend its board cut its 2016 dividend payout to zero. Overnight, the miner recommended its board conserve capital as a result of the prolonged slump in market prices, Reuters reported.

The decision comes amid concern from analysts that Vale may, in fact, be cash flow negative in 2016 unless it cuts costs and sells assets, Fairfax reports.

It also follows a decision in December by UK mining giant Anglo American plc to slash 85,000 jobs, sell assets and scrap its dividend.

With the price of iron ore, a steelmaking ingredient, falling from over $US180 per tonne in 2011 to around $US42 per tonne today, many miners are seeing their profit margins squeezed and could be going out of business.

However, many miners, such as Fortescue Metals Group Limited (ASX: FMG), have instead chosen to ramp-up production to lower unit costs. As the world’s fourth-largest miner, Fortescue is an example of a company which has made significant breakeven cost reductions. And now it is floating more iron ore into the seaborne market than ever before, at a time when demand is expected to fall.

Excess supply is adding to an already oversupplied market and leading some experts to believe low prices could be here to stay.

Foolish takeaway

All things considered, it would appear all the major mining companies’ dividends are in doubt. Personally, as a long-term share market investor seeking growth, I’d prefer a company pay less dividends to put itself in a better position to capitalise on a recovery in market conditions.

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Motley Fool writer/analyst Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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