Top broker tipping Rio Tinto to beat market expectations on earnings and dividend

There’s a sense of great expectation building in the resources sector with analysts recently upping their earnings forecasts on the back of the surprising strength in commodity prices.

But mining heavyweight Rio Tinto Limited (ASX: RIO) could still pull a rabbit out of its hat as Citigroup believes the miner will announce earnings and dividends next Wednesday that are above high market expectations.

The broker is forecasting underlying earnings per share (EPS) of US$4.93 and a final dividend of US$2.00 a share, which takes its full year dividend payment to US$3.10. This compares with consensus EPS expectations of US$4.81 and full-dividend of US$2.85.

The higher dividend will probably get investors more excited than the EPS beat, although both will help set a bullish tone for the stock for the rest of 2018.

The thing though that will more likely provide a second wind for the stock after its 18% run up in the past six months is a surprise extension in its capital management program with management already committing a $2 billion share buyback this year.

In fact, capital management is one of the key things investors will be hunting for during this month’s reporting season and Rio Tinto isn’t the only one that’s flushed with enough cash for buybacks and special dividends.

Its brother-in-arms BHP Billiton Limited (ASX: BHP) is another capital return candidate for this year, especially if it announces the sale of its shale assets as many are expecting. The world’s biggest miner could reap US$10 billion or more from the divestment, which will give management additional firepower to undertake a cash giveaway to shareholders.

It’s not only cash-generative resources companies that are well positioned for a capital management surprise.

Australia and New Zealand Banking Group (ASX: ANZ) is another that has scope to expand its capital “giveaway” to shareholders, thanks to its divestment strategy of selling non-core assets.

The bank is more aggressive in selling assets (maybe because it has more junk to get rid of) and this is why experts believe it is the only one of the Big Four banks that has the financial muscle to significantly extend its buyback program.

Don’t be surprised to also see QBE Insurance Group Ltd (ASX: QBE) throw a surprise capital management party this year as its new chief executive undertakes a restructure to streamline the underperforming business.

There’s usually a garage sale of underperforming assets that comes on the back of such exercises, which is a handy way to get some extra cash into its coffers.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, and Rio Tinto Ltd. 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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