At the latest Fortescue Metals Group Limited (ASX: FMG) share price, does the iron ore giant really offer a 15% dividend yield?
Fortescue is one of the biggest iron ore miners globally. It has major operations in Western Australia and it is also searching for other commodities and resources all around the world.
Fortescue’s massive yield?
For income investors, resource businesses are an interesting prospect. In some years they are capable of paying out massive dividends to shareholders.
Resource businesses are price takers. They have to take what price their customers are willing to pay, with a heavy influence from the supply and demand market.
When the iron ore price goes high, then Fortescue can make a financial killing. FY21 was a very profitable year for the company, allowing the business to pay a huge dividend with its commitment to pay out around 80% of net profit each year.
One of the main bonuses for income investors is that mining companies often trade on low profit multiples when compared to most other industries on the ASX. A lower earnings valuation usually means that the dividend yield is higher.
Valuation and yield
According to the FY22 earnings estimate on CommSec, the Fortescue share price is valued at under 8 times the estimated earnings.
The resources giant is expected to pay a dividend of $1.84 in FY22. That translates to a dividend yield of more than 14% when including franking credits at the current Fortescue share price. That’s a huge expected yield for such a large ASX share.
And don’t forget, the expected dividend is a large reduction compared to FY21.
Is the Fortescue share price an opportunity?
Fortescue shares have gone up by around 15% over the last month, so it is not as cheap as it used to be. Investors seem to be getting increasingly excited by the prospects of the green division of Fortescue – Fortescue Future Industries. It has announced numerous potential and planned green projects including turning AGL Energy Ltd (ASX: AGL) coal power stations in NSW into green hydrogen plants and building a green energy manufacturing centre in Queensland. Fortescue is contributing 10% of its annual net profit to these green initiatives.
If the green efforts really take off, then FFI could attract a much larger value within the overall business. I’m attracted to Fortescue because of FFI and the fact that the iron ore price has collapsed during this year. It’s usually better to consider cyclical commodity stocks near the lower point of the cycle.
