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Fortescue pays record dividends as earnings surge to new highs

Iron ore miner Fortescue Metals Group Limited (ASX: FMG) is rewarding shareholders with a big increase in dividends as it broke a number of records.

The Fortescue share price jumped 2.8% to $11.37 in early trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index slipped into the red.

Fortescue’s gain also bested its bigger peers. The BHP Group Ltd (ASX: BHP) share price dipped 0.6% to $38.56 while the Rio Tinto Limited (ASX: RIO) share price declined 0.2% to $98.14 at the time of writing.

Record dividends and earnings

The miner set new records in the six months ended December 2019 in shipments of 88.6 million tonnes (mt), underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of US$4.2 billion and net profit of US$2.5billion.

The underlying 1HFY20 EBITDA was 159% ahead of the same period last year and the net profit was 283% above the same period.

The interim dividend was also a record. Management resolved to pay a fully franked 76 cents a share dividend compared with a 30-cent payout this time last year.

It wasn’t only high iron ore prices averaging US$80 a tonne and record production that boosted profits. Fortescue reported a 3% drop in C1 cost (or cash cost) to US$12.73 per wet metric tonne (wmt).

A few black spots

If you wanted to nitpick at the results, there are a few blemishes. Firstly, don’t think that costs will continue to fall. Management is tipping the C1 cost to rise to between US$12.75 and US$13.25/wmt for FY20.

Secondly, the iron ore price has been slipping since the start of the year. As BHP warned when it reported its interim results yesterday, if the coronavirus isn’t contained over the next month or so, commodity prices could take a hit.

The bigger question for Fortescue is how the market will discount its lower quality ore. The price difference between Fortescue’s ore and BHP’s and Rio Tinto’s ore shrunk considerably over the past year and could widen again.

No capital returns

Thirdly, some shareholders may be disappointed that management didn’t undertake a capital return or give hints that one will be considered later in the year. Fortunately, the big increase in the first half dividend overshadowed this for now.

“Our continued focus on disciplined capital management together with a flexible balance sheet positions Fortescue strongly for the next phase of growth and the delivery of enhanced returns to shareholders,” said Fortescue’s chief executive Elizabeth Gaines.

“The Board have declared a fully franked interim dividend of A$0.76 per share (1H19: A$0.30 per share), which is a 65per cent pay-out ratio of 1H20net profit after tax.”

Fortescue expects full year shipments to come in at the upper end of its guidance of 170mt to 175mt. Its total capital expenditure is forecast at US$2.4 billion, incorporating the Pilbara Energy Connect program.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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.