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Is the Fortescue Metals share price a buy?

Is the Fortescue Metals Group Limited (ASX: FMG) share price a buy?

It’s been a pretty odd period for the resource business. Over the past month its share price has risen by 28%, but two months ago it was at around the same share price as today.

The decline to mid-August was due to trade war and global economy worries. There’s going to be less demand for iron and steel if the economy is slowing down.

But those fears seem to be subsiding, particularly today with China exempting a few US goods from the Chinese tariffs and the US President tweeting that the US would delay the implementation of its latest tariff hikes. That’s likely the biggest cause of today’s 2% share price rise for Fortescue.

FY19 was an extraordinary year for shareholders of Fortescue. Revenue increased by 45% to US$9.96 billion, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) went up 90% to US$6 billion and statutory profit jumped by 263%.

This enormous growth funded a 396% increase in fully franked dividends during the year to $1.14 per share.

It would be almost impossible for Fortescue to repeat the same level of growth again, but it will be interesting to see if it can repeat a similar level of profit.

In Australian dollar terms, its earnings per share in FY19 was 147.1 cents. So a small decrease could still fund the entire FY19 dividend, which would translate to a grossed-up dividend yield of 18%. But this is unlikely to be repeated.

Foolish takeaway

But unless the iron ore price crashes, it’s fairly likely that Fortescue will pay a solid dividend during FY20. The FY20 projected grossed-up dividend yield is 17% and it’s trading at 5x FY20’s estimated earnings. Who knows if these predictions will come true?

With resource prices we simply don’t know what’s going to happen. It could be a good time to buy Fortescue, but it could also be at near the top of the market.

That’s why I avoid resource shares and stick to quality ASX shares like these.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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