FMG share price in focus

Fortescue Ltd is an iron ore production and exploration company with assets located in the Pilbara region of Western Australia. The company was founded in 2003 and is headquartered in Perth.

Fortescue’s main operation is in iron ore production, shipping more than 190 million tonnes annually. However, Fortescue has also been ramping up exploration activities across Australia, Argentina, Chile, Brazil, and Kazakhstan for materials like copper, rare earths, and lithium.

This is part of Fortescue’s long-term strategy to take advantage of the shift to renewable energy. Demand for copper, lithium, and other rare earths are expected to skyrocket and Fortescue intends to fill that demand.

The case for Resources shares

The S&P/ASX200 Materials Index (ASX: XMJ) has averaged 3.00% per year in capital growth over the last 5 years. That compares to the average of all ASX sectors of 3.71% over the same period. Let’s take a look at why you might want a materials company like FMG in your portfolio.

Big dividends

While the capital growth has been good over the last few years, it’s really the dividends that most investors are interested in. Over the last 5 years the FMG dividend yield has averaged 8.64%per year.

Aussie materials companies have developed a good reputation of being reliable dividend payers. However, these are still commodity-driven businesses so the dividends (like the share price) can fluctuate quite a bit.

Growth potential

Mining is one of the backbones of our modern economy and the demand for things like iron ore, copper, and lithium is not going away any time soon.

In fact, the demand for a lot of precious metals is rapidly growing as the economy transitions to renewable energy. A lot of these materials are needed for things like electric car batteries and solar panels. Companies like BHP and Rio Tinto are investing a lot of money to put themselves at the forefront of this oncoming wave of demand.

FMG share price valuation

One way to have a ‘quick read’ of where the FMG share price is, is to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a share holder, but it can fluctuate year-to-year or between payments. Currently, Fortescue Ltd shares have a dividend yield of around 12.30%, compared to its 5-year average of 8.64%. Put simply, FMG shares are trading above their historical average dividend yield.

The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets. Both of these models would be a better way to value the share price.