S&P/ASX 200 Index (ASX: XJO) mining shares have built a reputation in the last few years for paying large dividends thanks to helpful commodity prices. But, one expert fears that the generous payouts may be finished, for now at least.
The broker Morgan Stanley has outlined why smaller dividends could be coming.
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Smaller dividends projected for iron ore miners
According to reporting by the Australian Financial Review, Morgan Stanley thinks payouts from ASX iron ore shares BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Fortescue Ltd (ASX: FMG) are all in line for sizeable cuts because of a much lower iron ore price and higher capital expenditure.
The broker suggested BHP's dividend is particularly at risk because it has a large debt on the balance sheet due to the Samarco mining disaster in Brazil.
Morgan Stanley has suggested the dividend payout ratio could be 55% for the second half of FY24 and drop to 50% in FY25. That would mean BHP would be at the bottom of its minimum payout policy of at least 50% of earnings.
The broker is expecting a smaller dividend from BHP even though it has forecast that iron ore prices could return to US$120 per tonne in the third quarter as China utilises the stockpile of iron ore in the country and new supply is limited, according to the newspaper's reporting.
Morgan Stanley suggests the iron ore price could remain supported on the supply and demand side of things, at least until the large African iron ore project called Simandou is operational.
Of the large ASX 200 iron mining shares, the broker prefers Rio Tinto because of its stake in Simandou.
The broker also likes commodity royalty business Deterra Royalties Ltd (ASX: DRR) and it has an underweight/sell rating on Fortescue shares.
Lithium payouts may also power down
Morgan Stanley is also pessimistic about dividends from ASX lithium shares.
The broker reportedly noted a concern about the Mineral Resources Ltd (ASX: MIN) balance sheet with its guidance of significant capital expenditure. Morgan Stanley suggests Mineral Resources' dividend payout ratio may be reduced to 20% for FY24 and FY25, which is below the current policy of paying out 50% of underlying net profit.
IGO Ltd (ASX: IGO) is one ASX share that's predicted to see a relatively low dividend payout ratio. IGO is forecast to pay 20 cents per share and 25 cents per share in the next two financial years, which would be at the lower end of its policy to pay between 20% to 40% of free cash flow.
For owners of Pilbara Minerals Ltd (ASX: PLS) shares, the broker is suggesting the ASX lithium company won't pay a dividend in FY24 or FY25 at all because of the lower lithium price and its growth plans (which come with a large price tag).
Morgan Stanley doesn't think the lithium price is going to fall much further in the short term. However, an ongoing increase in lithium supply could mean lithium prices won't significantly increase.
In the ASX lithium share sector, Morgan Stanley likes Mineral Resources the most.
