Fortescue's risks of going green: Blowout costs, less dividends and lower returns

Fortescue (ASX: FMG) announced a US$6.2bn decarbonisation strategy earlier this week that'll ditch the use of fossil fuels by 2030 to produce a carbon free iron ore product.

The move to go green at all costs will align with many climate conscious investors in an increasingly ESG-oriented investing landscape.

But on the flip side, investors may not have signed up for such a radical Fortescue. At its heart, Fortescue is the largest ASX-listed iron ore pure play that's expected to delivery strong cashflows and dividends.

Shifting some of that cashflow into renewable spend could weaken its market leading dividend and identity. And brokers seem to agree.

Green pivot lacks detail: Macquarie

Macquarie analysts were rather cautious about the expected positive net present value of Fortescue's decarbonisation strategy.

To date, the details about the project has lacked detail and Macquarie expressed concerns about the operating costs of being fully dependent on renewable energy sources.

The US$6.2bn capital investment will ramp up between years FY24-28 and the analysts warned that ongoing costs could be material and compete with shareholder returns.

Macquarie lowered its medium-term dividend payout ratio assumption to 60% compared to 75% in FY22 and 80% in FY21.

An Underperform rating was maintained with a $14.30 target price (from $14.50).

Potential dividend reduction: Morgan Stanley

Similarly, Morgan Stanley was looking for more details about where the US$6.2bn is coming from, whether that be from cash flow and/or debt.

If the capital spend is coming from cash flows, Morgan Stanley downgraded its FY24-26 dividend forecasts to (US cents per share):

• FY24: 105 cents to 89 cents (-15%)

• FY25: 80 cents to 47 cents (-41%)

• FY26: 59 cents to 20 cents (-66%)

The broker also expressed concerns over the deployment of an additional 2-3 GW of renewables and battery storage as costs could run as high as US$7.1bn compared to Fortescue's guidance of US$4.6bn.

An Underweight rating was retained with a $15.15 target price.

Fortescue share price chart