I'm on a mission to uncover some of the ASX's most compelling dividend-paying stocks. The aim is to provide readers with the key data and forecasts to make more informed decisions. Today, we're reviewing one of the market's most popular dividend stocks – Fortescue Metals.
Fortescue (ASX: FMG) has been one of the market's most reliable and consistent dividend stocks. In the past three years, the company has averaged a dividend yield of 10.6%, according to Citi.
Fortescue built its success on a straightforward business model: Mining iron ore at low cost, shipping it to China and returning most of its earnings to shareholders through dividends. However, the company's ambitious focus toward green energy is poised to fundamentally reshape both its earnings profile and dividend policy.
Not only is its longstanding identity at risk – but weak demand from China, the world's largest consumer of metals, may place further downward pressure on iron ore prices.
With all that said and done: can Fortescue maintain a 10% dividend yield?
Fortescue is Australia's third largest iron ore producer and forecast to grow its iron ore production from 191.6 million tonnes in FY24 to approximately 210 million tonnes by FY26 through the development of its Iron Bridge Project in WA. The market typically perceives Fortescue to have the highest leverage to China's economy and iron ore prices.
Market cap: $55.3 billion
Dividend yield: 10.96%
Price-to-earnings ratio: 5.99
12-month performance: -34%
Fortescue's September quarter update triggered a 3.2% selloff after the company flagged lower-than-expected iron ore shipments at higher costs.
Iron ore shipments of 47.7Mt, up 4% compared to a year ago
Hematite C1 cost of US$20.1/wmt, up 12% amid higher strip ratio and inflationary pressures
Cash of US$3.4 billion and net debt of US$2.1 billion
Guidance for FY25 shipments, C1 cost and capex remains unchanged
Strip ratios and weather changes: "Hematite C1 cost was $20.16 per tonne. Now that was up 12% on 1Q24. It was impacted by a higher strip ratio in the quarter, together with some inflationary pressures."
FID for Green Projects: "Work continues on our four green hydrogen projects in Australia, the United States, Norway, and Brazil in particular feasibility studies continue to advance."
In mid-November 2024, Citi published a note suggesting Fortescue may see some near-term upside due to factors such as the stock's underperformance vs. larger iron ore peers, additional China stimulus and higher China steel output.
But longer-term, the analysts flagged ongoing efforts by steel producers to reduce carbon emissions and increased iron ore supply "should all conspire to see iron ore prices lower."
Citi forecasts benchmark iron ore prices to average US$85 a tonne in 2026. This forecast faces several uncertainties, including potential new supply sources like Guinea's Simandou project and expanded production from Australia and Brazil, as well as fluctuating Chinese demand.
As far as forecasts are concerned, the analysts modelled the following outcomes for FY25-27.
| FY24a | FY25e | FY26e | FY27e |
---|---|---|---|---|
Iron ore 62% Fe (US$/t) | 119.0 | 96.3 | 88.8 | 85.0 |
Cash costs (A$/wmt) | 27.8 | 29.0 | 26.7 | 25.7 |
Iron ore shipments (tonnes) | 191.6 | 192.8 | 204.0 | 206.3 |
NPAT (US$m) | 5,683 | 2,591 | 2,426 | 2,836 |
EPS (US cents) | 184 | 84 | 79 | 92 |
EPS growth (%) | 3% | -54% | -6% | 17% |
DPS ($A cents) | 197 | 62 | 55 | 63 |
Dividend yield (%) | 10.9% | 3.4% | 3.0% | 3.5% |
Payout ratio (%) | 70% | 50% | 50% | 50% |
The above forecasts paint a rather bearish picture for Fortescue – The all-important iron ore price is forecast to trend lower, costs will tick higher between FY24-25 and the company's dividend payout ratio is set to hit 50% over the next couple of years.
While potential upside factors exist – such as unexpected disruptions to iron ore supply or a rebound (or stabilisation) in China's economy and property market – several headwinds challenge Fortescue's position as a top dividend stock.
Clean energy capex to soar. Fortescue is progressing a number of green initiatives including the Phoenix Hydrogen Hub and the Green Energy Manufacturing Centre in Gladstone. Citi expects Fortescue's capex to soar 39% year-on-year in FY25 and stay at such levels over the near term.
| FY24a | FY25e | FY26e | FY27e |
---|---|---|---|---|
Capex and investments (US$m) | -2,834 | -3,950 | -4,081 | -3,611 |
Net cash flow (US$m) | 968 | -2,501 | -1,902 | -992 |
Capex plus higher costs and lower iron ore prices to weigh on key investment ratios. Citi forecasts a number of key metrics to fall dramatically between FY24-25. For example, free cash flow yield is forecast to fall from 14.6% to 1.8%, return on equity to halve from 29% to 14% and so forth.
The Fortescue that we all know and love might be a thing of the past. While the company's push into green energy is admirable, it might not deliver the predictable returns that attracted shareholders in the first place.
Although these green investments are expected to begin generating earnings by 2026-27, the path forward remains uncertain. This was highlighted when Fortescue abandoned its 2030 green hydrogen production target in July 2024.
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