The Fortescue Metals Group Limited (ASX: FMG) share price is being whacked today. But there’s a logical reason for it.
Why the Fortescue share price is dropping
It’s not normal for one of the ASX’s largest companies to drop by a large amount. But it makes sense when you think about what’s happening with Fortescue.
The iron ore mining giant has just gone ex dividend. That means that new investors today are no longer entitled to the dividend.
But Fortescue’s dividend isn’t like a dividend from most other businesses. It’s a really big dividend yield. The dividend that just went ex dividend is a fully franked
yield of 10%. It is potentially reasonable for the Fortescue share price to fall 10% considering the lack of that large dividend for new investors.
Fortescue shareholders have been very lucky when it comes to dividends. In FY21 they will have received a fully franked dividend yield of 17.2% at the pre-open price.
The FY22 dividend didn’t isn’t likely to be as big as FY21 considering the steep drop of the iron ore price.
What to make of the Fortescue share price now
A lower share price is usually more attractive to buy at than a higher one.
I think Fortescue is a very interesting business. It’s making huge profit from its iron ore operations. But it also has this large potential with Fortescue Future Industries (FFI) which is looking to address a number of areas when it comes to greener solutions for various industrial things like green trucks, green ships, green steel and green hydrogen. How much profit can FFI generate in the future? Time will tell.
A key question now is what happened to the iron ore price. If it stabilises at around US$140 or even US$150 then Fortescue can still generate a very nice amount of profit and pay high dividends. But if the iron ore price keeps falling, as many analysts expect, then I wouldn’t be surprised to see the Fortescue share price fall further.
Using ComSec numbers, Fortescue is expected to pay a fully franked dividend of $3.39 per share in FY22. But that projection could easily change, depending on what happens to iron ore prices.
