Is Fortescue Metals Group Limited’s 7% dividend worth a look?

It’s certainly been a year to forget for Fortescue Metals Group Limited (ASX: FMG) shareholders.

Those who have been on the register since the beginning of 2014 have watched their stock fall a sickening 48.3%, with the shares now trading at just $3.03. Earlier in the day, they fell even further to record a fresh 16-month low at $2.99.

The woeful performance comes as a result of the waning iron ore price, which has slipped a similar amount since the beginning of the year. In fact, overnight it was worth just US$75.84 per tonne, down from a much more respectable US$135 a tonne at the beginning of the year.

Given the enormous discount that Fortescue is currently trading at, investors might be interested in the stock as a buy opportunity. After all, Fortescue’s shares are trading on a trailing P/E ratio of just 3.2x, as well as a trailing dividend yield of 7%, fully franked.

Despite those appealing numbers, I would have to suggest investors approach with extreme caution.

First and foremost, Fortescue is heavily ramping up its production of iron ore, and thus reducing its operating costs. However, it will still maintain a higher breakeven price than that of its two larger rivals, being BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Fortescue remains risky, particularly with Citigroup now forecasting the iron ore price to fall into the $50s, as highlighted by my colleague Mike King.

Then you need to consider Fortescue’s massive debt position. Although the company has reaffirmed its commitment to reducing its level of gearing, these lower iron ore prices are making that task increasingly difficult. Some analysts have even suggested the miner may have to scrap dividend payments at some point in the future in order to repay its creditors.

There goes the appeal of that supposed 7% fully franked dividend yield…

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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