FMG share price in focus
Fortescue Ltd is an iron ore production and exploration company started by the well-known Australian polymath Andrew “Twiggy” Forrest. The company was founded in 2003 and has assets across the Pilbara region of Western Australia.
Fortescue’s main operation is iron ore production, shipping more than 190 million tonnes annually. However, Fortescue has also been ramping up exploration activities for materials like copper, rare earths, and lithium. This exploration covers countries including Australia, Argentina, Chile, Brazil, and Kazakhstan
This is all 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 with increasing battery and electric vehicle production and Fortescue intends to fill that demand.
The case for Resources shares
The S&P/ASX200 Materials Index (ASX: XMJ) has averaged 5.17% per year in capital growth over the last 5 years. That compares to the average of all ASX sectors of 3.38% 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 goes through good periods, it’s really the dividends that most investors are interested in when assessing resource shares. After all, it’s what they’ve been known for for many years. Over the last 5 years the FMG dividend yield has averaged 10.52% per year.
Aussie materials companies like FMG 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 ‘fast read’ of where the FMG share price is would be to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a shareholder, but it can fluctuate year-to-year or between payments. Currently, Fortescue Ltd shares have a dividend yield of around 10.28%, compared to its 5-year average of 10.52%. Put simply, FMG shares are trading below their historical average dividend yield.
Be careful how you interpret this information though – it could mean that dividends have fallen, or that the share price is increasing. In the case of FMG, last year’s dividend was greater than the 3-year average, so the dividend has been growing.
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 FMG share price.
