Dividends this year may struggle to match last year's boom but this shouldn't stop Rio Tinto Limited (ASX: RIO) from paying a big special dividend this month.
That is the expectation analysts at Macquarie ahead of the miner's results on 23 February.
Rio Tinto's special dividend forecast
"RIO has stated the intent to payout 40-60% of underlying earnings in ordinary dividends throughout the cycle, which can be flexed higher with special dividends," said the broker.
"We have forecast a final dividend of US$4.75, which includes our estimated special dividend of US$1.28."
This half-year payout alone translates to a yield of 5.6% for the Rio Tinto share price based on the current exchange rate. Throw in franking credits, and the yield is bolstered to around 8%.
If Rio Tinto does pay a special dividend this month, it will mark its third consecutive special dividend payment.
More capital returns on the horizon
Macquarie doesn't think its estimate on the US$475.2 million ($666.5 million) in special dividends is too high. The total payout ratio of the regular and special dividends comes to 82%. This is largely in line with Rio Tinto's historical payout ratios.
But the shareholder cashback party may not end at the February reporting season. High commodity prices are expected to keep Rio Tinto's balance sheet flushed with cash.
"We believe there could be potential for additional capital management, likely in the form of a special dividend, given strong iron ore earnings and a healthy balance sheet," said Macquarie.
"However, we also note that near[1]term cash outflows could constrain RIO's additional cash returns to shareholders, such as the potential increased closure and rehabilitation costs."
What to expect at Rio Tinto's February results
These costs relate to Rio Tinto's recent announcement on the Ranger uranium mine in the Northern Territory. The miner has also committed to investing to reach net zero carbon emissions.
The market is expecting the iron ore giant to deliver strong growth numbers this month. Stubbornly high prices for the steelmaking ingredient are forecast to see Rio Tinto's iron ore division deliver a 48% increase in underlying earnings before, interest, tax, depreciation and amortisation (EBITDA) to US$27.8 billion in calendar 2021, compared to 2020, according to Macquarie.
Iron ore makes up around 73% of group earnings. Rio Tinto's exposure to aluminium and copper are also tipped to bolster its EBITDA growth as these commodities have also rallied.
Not without risks
However, there are a few pain points to watch. One obvious risk is cost inflation as just about every ASX company has reported rising costs.
Meanwhile, COVID-19 remains a problem as other miners in the Pilbara have recorded cases recently.
Then there are geopolitical risks from Rio Tinto's problem plagued Oyu Tolgoi mine in Mongolia. Don't forget the cancellation of its lithium exploration licenses in Serbia either.
Nonetheless, Macquarie is recommending the Rio Tinto share price as outperform. Its 12 month price target on the shares is $130.
