Does the current Fortescue Metals Group Limited (ASX: FMG) share price really offer a dividend yield of 36%?
Let’s think about how that yield is being calculated.
Over the last 12 months, Fortescue has paid dividends that amount to $3.58 over FY21. That’s a huge payout and amounts to a fully franked dividend yield of 25% at the latest Fortescue share price.
Then the franking credits can be added to the yield, thanks to Australia’s generous taxation system that tries to ensure people aren’t taxed twice on the same profit a company makes.
Including the franking credits, the Fortescue dividend yield from FY21 is 36%. Amazing, right?
FY22 expectations
I don’t think the Fortescue dividend in FY22 is going to be as big as FY21.
Fortescue has committed to paying around 80% of its net profit as a dividend to shareholders, re-investing the rest into other parts of the business.
If the profit falls, the dividend is seemingly going to fall.
No-one knows what Fortescue’s FY22 profit is going to be. But I can tell you that the iron ore price has fallen by roughly half over the last few months because of a few key reasons. That seriously harms the profit potential because Fortescue has to just take whatever price it can get for the iron ore it produces.
Analysts have had their best shot at estimating what Fortescue is going to achieve in FY22. The estimates are varied.
Morgan Stanley (a broker) reckons that, at the current Fortescue share price, it is going to pay a dividend of $2.13 per share in the current financial year, which translates to a yield of 15%, or 21.5% with the franking credits.
Whereas CommSec numbers currently suggest a dividend of $3.39 per share in FY22, which translates to a fully franked dividend yield of 23.9%.
My thoughts on the Fortescue share price and dividend
I think the FY22 dividend is going to be closer to the Morgan Stanley estimate than the CommSec one, but whatever it is, it’s likely to be a very big yield for FY22 at this lower share price.
Whilst I wouldn’t buy a business just for the dividend, it seems that the risks for new investors are a bit lower now that the iron ore price has fallen back to a ‘normal’ level. Fortescue could fall a bit lower than here, but it has already dropped 46% from the peak at the end of July 2021, so I don’t think it’s going to fall that much further when you look at the iron ore miner experience around 2016 as an example.
