Our major miners have evolved to become one of the best and most dependable dividend-paying stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), but the first crack could be emerging that could test investors’ faith in this seemingly iron-clad belief.
The BHP Group Ltd (ASX: BHP) share price, Rio Tinto Ltd (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price have outperformed over the past year or so as their strong balance sheet, high commodity prices, overflowing coffers and generous capital returns attracted buying interest from investors.
These shares aren’t only high-yielders in a world of low interest rates, but there’s an abundance of confidence that they can sustain their high dividends over the medium-term, if not longer.
Fortescue facing new dividend risk
However, Citigroup is warning that unless Fortescue Metals produces a bigger than expected profit result next month to pay a final dividend or be willing to go above its 50% to 80% dividend payout policy.
The broker’s assessment comes after the miner paid two special dividends in 2019 worth 71 cents per share in total.
Moving above its payout target will ring alarm bells as investors will start to question if Fortescue is as cash-flushed as they had assumed. Such worries could prompt the market to also ask questions about BHP and Rio Tinto, in my view.
FMG’s share price running ahead of fundamentals
The good news is that BHP and Rio Tinto are in a much shape (although the cost blowout at Rio Tinto’s Oyu Tolgoi project worries me) and Citigroup was only referring to Fortescue as it believes the market may be expecting too much from the miner.
“We are concerned that market optimism has outpaced the upgrade cycle,” said Citi.
“With growing potential for the iron ore rally to moderate, we see the market as being at an important fork in the road. On the downside, we see pundits as approaching ‘peak positivity’ in their assumptions with the top end of consensus making little sense to us.”
On the other hand, iron ore prices and Chinese steel output can continue to surprise on the upside as they have over the past several months even as the ongoing trade war between the US and China drags on world growth.
Citi acknowledges that the market can continue to experience supply tightness well into FY20, particularly if recent production issues from the majors operating in the Pilbara continue to dog the sector.
“In either case we see the probability as being skewed to the downside for iron ore prices, and we expect the market to be more focused on earnings direction vs earnings strength,” said the broker.
“With FMG trading at a sizeable premium to our 12-month price target of A$6.19 per share, we maintain our Reduce rating.”
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
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 Scott Phillips.
- The next battle facing these ASX stocks will come from within – August 13, 2020 12:52pm
- Qantas share price is facing this new challenge in FY21 – August 13, 2020 9:53am
- These ASX stocks could be the next reporting season heroes – August 12, 2020 2:53pm