Broker snap: Credit Suisse sees greater scope for dividends at Rio Tinto

3rd Feb 2014 08:58

Rio Tinto´s drive to significantly lower its levels of capital expenditure will yield strong positive free cash flows (FCF). That means there is 'up-side' to consensus expectations for an eight per cent dividend increase (Credit Suisse: 15%) and holds out the prospect of a steadily growing and 'dependable' dividend pay-out, thanks to the outfit's now leaner balance sheet, analyst J.Gurry at Credit Suisse said on Monday. Hence his decision to reiterate his 'outperform' recommendation on the stock, alongside a target price of 4,000p, and add it to their 'Focus List'. Particularly noteworthy, the analyst goes on to explain that his forecasts for the company´s free cash flow remain true "even under almost all commodity price scenarios". The company is due to publish its full-year results on February 13th. Rio Tinto´s net present value (NPV)-based target price offers near 30% potential upside, while its single digit earnings multiples are currently over-compensating for the expected fall in the price of iron ore, Gurry said. The firm´s shares were trading at nine times earnings per share (EPS) and five times earnings before interest taxes, depreciation and amortisation (EBITDA).As a cross-check, he explained that based on 2015 guidance for iron-ore production at its Pilbara mine of 330mt, and a $90/t price for iron ore, then the company´s earnings per share would be at $5.70. That would equate to a share price of 4,100p and a still strong balance sheet ($13bn net debt), strong FCF ($19bn+ EBITDA and $8bn in capex guidance for 2015).AB