The Motley Fool

Is this the first major ASX miner at risk of cutting its dividend?

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.”

NEW! Top 3 Dividend Bets for 2019

With interest rates likely to stay at rock bottom for months (or YEARS) to come, income-minded investors have nowhere to turn... except dividend shares. That’s why The Motley Fool’s top analysts have just prepared a brand-new report, laying out their top 3 dividend bets for 2019.

Hint: These are 3 shares you’ve probably never come across before.

They’re not the banks. Not Woolies or Wesfarmers or any of the “usual suspects.”

We think these 3 shares offer solid growth prospects over the next 12 months. The first two currently offer fat, fully franked yields. The last is a surprising REIT offering you the benefits of being a landlord with none of the hassle! You’ll discover all three names and codes in "The Motley Fool’s Top 3 Dividend Shares for 2019."

Even better, your copy is free when you click the link below. Fair warning: This report is brand new and may not be available forever. Click the link below to be among the first investors to get access to this timely, important new research!

The names of these top 3 dividend bets are all included. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies move – we may be forced to remove this report.

Click here to claim your free copy right now!

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.