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 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 around 19% over the last month. As readers probably know, a commodity business’ performance is predominately 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 and 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.
