Will Rio Tinto pay a special dividend tomorrow?

Special dividends aren’t something you hear much about these days, but there’s a chance Rio Tinto Limited (ASX: RIO) could pay one tomorrow.

Our largest iron ore miner is scheduled to report its first half earnings after the market closes on Wednesday and expectations are high.

The Rio Tinto share price jumped 1.2% on Tuesday to $104.11 even as the S&P/ASX 200 Index (Index:^AXJO) slipped 0.4% into the red on profit taking.

High earnings expectations

Rio Tinto just about regained all of its losses from the COVID-19 market meltdown and investors will see tomorrow if the rebound is justified.

But it isn’t so much the profit numbers that will be dominating as the market got a good sense of what’s coming after the miner posted its second quarter production report two weeks ago.

However, the analysts at Macquarie Group Ltd (ASX: MQG) still believes Rio Tino can deliver a modest but pleasant earnings surprise.

Chance of a small earnings beat

“Our revenue, EBITDA and earnings forecasts are 1%, 3% and 4% higher than Vuma consensus, respectively,” said the broker.

“Divisionally, our EBITDA forecast is in line for iron ore while beats in Aluminium and at IOC is offset by lower forecasts for Copper and Other.”

Dividends to steal the limelight

Having said that, it’s the interim dividend that will steal the show. Consensus expectations on this front is very wide as it ranges from US$0.94 to US$2.21 a share.

Analysts are clearly dividend on the dividend with Macquarie tipping a regular US$1.70 ($2.38) a share first half dividend. If the broker is right, it will reflect a 60% payout ratio.

“However, given strong iron ore driven cash flows and low levels of gearing of ~3%, we believe there is scope for a special dividend surprise of up to US$1.00,” added Macquarie.

High yield income stock

This will put Rio Tinto’s 2020 yield at 5.5%, or 8% if franking is included. That’s a pretty generous payment given that dividend superstar Commonwealth Bank of Australia (ASX: CBA) may not pay a final dividend this year.

Paying a special dividend provides a benefit beyond its monetary value. If management provides this one-off reward, it will also signal a bullish outlook.

High quality ASX stocks that are concerned about future earnings may still pay its regular dividend, but it certainly won’t cough up a special dividend.

Foolish takeaway

The broker reiterated its “outperform” (or “buy”) recommendation on Rio Tinto ahead of its results and its 12-month price target is $111 a share.

Other major iron ore producers are also well placed to undertake a capital return of sorts. But if I had to guess which, I would pick the Fortescue Metals Group Limited (ASX: FMG) share price over the BHP Group Ltd (ASX: BHP) share price.

More reading

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• Top broker warns earnings expectations for the ASX reporting season are too high
• a2 Milk and 1 other quality ASX 200 share to buy and hold beyond 2026
• UBS picks the best ASX gold miners to buy today
• ASX 200 jumps 0.75%: Westpac tumbles on AUSTRAC update, Credit Corp surges

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Commonwealth Bank of Australia, Macquarie Group Limited, and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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 Scott Phillips.

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