Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Is Fortescue’s yield sustainable?
Could the Fortescue Metals Group Limited (ASX: FMG) share price be worth looking at for its 24% dividend yield?
Fortescue’s huge dividend yield?
The iron ore giant is expected to pay a huge dividend in FY22, which is the financial year we’re now in. CommSec’s data suggests a dividend of $3.38 per share in FY22. That’s a fully franked dividend yield of 16.6% at the latest Fortescue share price.
When you add franking credits to that dividend, in comes to a yield of 23.7%.
If you’re thinking that sounds too good to be true, it is possible, but not certain. The last 12 months of dividends (not including the FY21 final dividend, which is expected to be huge), amounts to a yield of 17% including the franking credits.
Fortescue shareholders, including major holder Andrew Forrest, are swimming in cash from dividends at the moment.
Is it a good idea to think about the Fortescue share price right now?
The Fortescue share price has fallen by about 19% over the last month. As readers probably know, a commodity business’ performance is predominantly linked to the strength of that commodity. Iron ore has sunk a lot, very quickly. Several weeks ago it was around US$220 per tonne; now it has dropped to US$160 per tonne.
I don’t think investors were expecting iron ore to stay above US$200 forever. That’s exactly why commodity businesses trade at very low price/earnings ratios (P/E ratios) – profit is expected to be volatile.
The question is, how much further will the iron ore price drop? This is actually still a pretty high price compared to the last decade. But Fortescue is a more compelling business than it was a few years ago. It is producing more iron ore, the Iron Bridge Magnetite Project can unlock higher quality product, it’s exploring for more resources around the world and Fortescue Future Industries (FFI) could unlock a number of other earnings avenues. FFI may be able to generate a lot of earnings in the future from ‘green’ initiatives.
The Fortescue share price isn’t great value today considering the iron ore price could keep falling. I hope FFI could become a larger part of the pie in the future, but the iron ore is still the all-important division right now. It’s likely to keep paying decent dividends, but the FY23 dividend could be much lower. So I don’t think a dividend yield above 20% is sustainable at this level.
I’m waiting for a lower Fortescue share price before topping up my small holding of Fortescue shares.
Information warning: The information in this article was published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.
