Australia's two largest resource companies could be forced to slash their dividend payouts or face ratings downgrades on their debt.
According to Fairfax media reports, credit analysts at Commonwealth Bank say the two miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) will have to pick between the two, after the massive plunge in the iron ore price.
The CBA analysts expect ratings agency Standard & Poor's to move on the miners' credit ratings and potentially downgrade them thanks to the iron ore falls. That could mean higher interest payments on their debt, forcing the miners to cut their dividend payouts.
Currently BHP is paying out an estimated 64% of earnings in dividends and sports a 4.9% fully franked dividend. Rio, on the other hand is paying out 57% of earnings for a 4.5% fully franked dividend.
Fairfax reports that Rio has vowed to defend its credit rating, but that may mean lower dividends for shareholders. The problem is that both companies maintain what they call a 'progressive dividend policy'. The aim as BHP states is, "to at least maintain or steadily increase our base dividend in US dollars terms at each half-yearly payment." In other words, no cuts.
Rio has also committed to never reducing the dividend amount it pays to shareholders.
So what will the big miners do? Change their dividend policy and reduce the dividends, or try and defend their respective credit ratings? Perhaps they'll try and do both?
Whatever the outcome, if you're invested in BHP or RIO, or Woodside Petroleum Limited (ASX: WPL) for their dividends, sooner or later you're likely to receive a shock. At the end of the day, they are capital intensive resources companies, and need to churn a substantial amount of earnings back into their business each and every year. Failure to do that only kicks the can further down the road and makes the decision to cut dividends at some stage even harder.
When there are better dividend alternatives out there, like the company below, you don't need to even consider those three resources stocks.
