Rio Tinto (RIO) and BHP (BHP) have returned to making big acquisitions for the first time in over a decade to capitalise on the demand for metals needed for renewable energy, including copper and nickel.

For shareholders, that means dividend payouts and yields are likely to fall according to Morningstar analyst Jon Mills.

High commodity prices are encouraging the big miners to expand their commodities production and invest more in metals poised to benefit from decarbonisation rather than returning excess cash to shareholders.

During 2022, Rio Tinto doubled its stake in the Oyu Tolgoi copper and gold mine in Mongolia and also completed the Rincon lithium acquisition in Argentina.

BHP too made its full-priced bold bid for Oz Minerals (OZL), which is likely to be approved when shareholders vote in April. Rio Tinto is trying to increase its exposure into lithium via its Rincon brines project in Argentina and Jadar lithium project in Serbia.

Now, shareholders in each company could pay for those acquisitions and investments in the form of lower dividends in coming years.

“Payout ratios are likely to be lower than recently as both companies spend more on growth rather than solely focussing on returning excess cash to shareholders,” said Mills.

“This is a change since around 2015 when the industry has focussed on first deleveraging and returning excess cash to shareholders … We’ve lowered our assumed near-term payout ratio to 60% [for Rio Tinto], from 70%, to reflect this," he says.

Company earnings are the other key driver of actual dividends paid, Mills adds.

"Iron ore remains the main driver of both companies’ earnings and the very high iron ore prices in recent years are another reason why dividends paid and yields were so high recently," he says.

“However, we assume iron ore prices will fall materially from current spot prices of about $US130 per tonne to our assumed midcycle price of around US$60 per tonne from 2026, which, if we are correct, will likely lead to lower earnings and dividends paid,” he adds.

For Rio Tinto, Mills expects the dividend yield to fall to 6.4% in 2023, down from a high of 14.3% in 2021. Dividend payouts will fall to around 60% of profits in 2023, down from as high as 79% in 2021.

Dividend yields on BHP shares are also expected to fall. Mills is predicting BHP’s dividend yield will fall to just 6.4% in 2023, down from 11.5% in 2022 and 9.3% in 2021.

Mills doesn’t see much better value in Fortescue Mining Group (FMG), which he also thinks is overvalued, despite trying to transform into a green energy superpower and produce green hydrogen.

“We remain more circumspect as green energy is a capital intensive and competitive space. Fortescue trades at a 43% premium to our fair value estimate of $15 per share," he says.

"We think this is due to excitement over its green energy ambitions as well as higher near-term iron ore prices, which are being driven by optimism over increased demand from China as it reopens.”

Instead, Mills thinks minerals sands miner Iluka (ILU) will benefit from greater demand for rare earths minerals through construction of its new refinery at Eneabba.

“It has cut a good deal with the Australian government, with Aussie taxpayers funding most of the cost of building the rare earths refinery … As such, Iluka has minimised its downside while maintaining exposure to most of the upside should rare earths prices remain high due to rising demand for use in renewables and electric vehicles.”

3-star Iluka is trading around Morningstar's fair value estimate of $10.50 per share.

Opportunities in energy


Mark Taylor, senior equity analyst with Morningstar says unlike BHP or Rio Tinto, Woodside Energy (WDS) is one of the larger under-valued resources companies in Morningstar’s coverage, so too is Santos (STO).

“Both have benefitted from recent high energy commodity prices, but those prices have retreated from highs and a repeat of the recent record earnings is unlikely,” says Taylor.

See more analysis from Mark Taylor on the energy and mining services sector here. 

Both companies have ‘new energy’ projects including hydrogen and solar projects, but Taylor says these will gradually replace their conventional hydrocarbon businesses and returns on new energy fall considerably short of those on conventional fossil fuels.

Taylor has a $44.50 fair value estimate for no-moat Woodside, compared to its price of around $31. For Santos, he sees fair value at $12.00, compared to its $6.80 price.

He also points to mining services provider Worley (WOR) as reinventing itself as sustainability facilitator, providing the engineering services for renewables projects.

“This is probably a good way to play the renewables space, providing the services to companies, rather than owning the assets. But the market seems to agree, and Worley is currently over-valued in our opinion.”

Separately, ETF provider VanEck has crunched data from Bloomberg and its analysis reveals that renewable energy companies collectively have significant earnings potential.

Of all 20 industry groups tracked by Bloomberg, including the traditional oil and gas sector and materials sector, the renewable energy sector boasts the greatest forecast earnings growth for the two years of 39.9% and forecast sales growth of 23.8%.

That sector leads all 20 industry sectors ranked globally by Bloomberg over the year, to March 2025, and compared to 14.6% and 4.4% for materials (including iron ore producers BHP and Rio Tinto) and 8.5% and 2.4% for the oil and gas sector (which includes Woodside).