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Is Fortescue Metals Group Limited cheap again?

It’s been a wild 12 months for Fortescue Metals Group Limited (ASX: FMG) shareholders!

source: Google Finance

The share price fell below $2 in 2016 as the iron ore price plunged to around US$20 per tonne and many analysts questioned whether the business could continue to operate with its large debt load.

Unbelievably, no more than 14 months later the share price surged over $6 as the demand for iron ore soared and the spot iron ore price rose above $100 yet again. Fortescue wisely used these funds to pay down debt and now it appears one of the best-placed miners on the ASX.

Where to from here?

Today the share price sits at around $4.85, putting the company on a trailing price to earnings ratio of around 11 and dividend yield of 4%, fully franked. The trailing figures don’t paint a particularly accurate picture however, as Fortescue will report vastly different numbers this year owing to the higher average price received per tonne of ore sold.

For example, Fortescue reported a profit of $1.2 billion for the 2017 first half, compared with $1.3b for the whole 2016 financial year.

Now that we’re nearly through the 2017 financial year, it’s worth having a look at what analysts estimate Fortescue will report for its full year result in August. Based on the mean forecast of the analysts that research the company:

  • Net profit of $2.3b ($up from 1.3b)
  • Earnings per share of 81 cents (up from 42 cents)
  • Dividend per share of 34 cents (up from 20 cents)

This would place Fortescue on a price to earnings ratio of just 6 and dividend yield of 7% fully franked!

Is Fortescue Metals Group Limited cheap again?

The problem with Fortescue is that it’s essentially impossible to predict what the company’s profit will be in the coming years. Unlike companies that can reasonably control the price of the goods they sell, Fortescue is a price taker and demand for the group’s ore is heavily linked to the requirements of China and India.

I believe there are definitely better investment opportunities than Fortescue available at the moment. Here’s an example:

A Big, Fat, Fully Franked Dividend

This company’s dividend is almost the stuff of legends. Since it started paying dividends in 2007, it has increased its payout to shareholders every single year, a run that includes 21 consecutive dividend increases.

Based on the last 12-months of dividends, its shares are currently offering a fully-franked 4.8% yield, which grosses up to almost 7% when those franking credits are included. And in stark contrast to the likes of Commonwealth Bank and Telstra, this company just increased its dividend by over 13%, and guided for 2017 profits to grow by 20%!

Discover the name of this “new breed” of blue chip along with 2 others in our new FREE report "The Motley Fool’s Top 3 Blue Chips Stocks For 2017."

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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