The Fortescue Metals Group Limited (ASX: FMG) share price is outperforming the market today after the iron ore miner was upgraded by a leading broker.
The Fortescue share price jumped 0.8% to $9.55 on Wednesday when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index slumped 1.7% on worries that central banks won't be able to stem the fallout from the coronavirus.
In contrast, fellow miner BHP Group Ltd (ASX: BHP) declined 1% to $33.66. Interestingly, the Rio Tinto Limited (ASX: RIO) share price rallied 1.4%, but its probably because it hasn't gone ex-div and investors are buying it for the dividend entitlement.
On the other hand, Fortescue is already trading without its dividend rights.
Big upgrade
This doesn't put off investors after UBS upgraded the stock by two full notches to "buy" from "sell". The coronavirus may have triggered a sharp sell-off over the past few days, but the outbreak could be a blessing to Fortescue.
"With COVID-19 driving volatility in both commodity and stock markets, we think China is likely to introduce commodity intensive stimulus to soften any economic downturn," said the broker.
"We upgraded our 2020/21 iron ore prices 9% and 7%, respectively, with demand lifts expected from Q2 20."
"Assuming a 65% pay-out ratio FMG provides a 15% dividend yield based on our forecasts."
Big big dividends
It's almost unheard of for an ASX large cap to have such a big yield. UBS thinks Fortescue can because of expectations that the Chinese government will undertake a large infrastructure building exercise to get the country's economy back on its feet.
"Channel checks indicate iron ore shipments are continuing as per normal, with port inventory drawn down last week as rail remains in operation and truck drivers returning to work," said the broker.
"As activity resumes, we would expect steel production to lift – and with it, iron ore demand."
Is the high yield sustainable?
But don't expect the high dividend payments to be sustained. Iron ore prices could come off as the effects of the stimulus program wears off – at least that's what UBS is expecting.
Nonetheless, Fortescue can still pay a very decent dividend for at least the next two years. The broker is forecasting a yield of around 11% for FY21 and 7% for the following year.
In a low yielding environment with record low interest rates, that's too juicy an opportunity to pass up.
UBS lifted its price target on Fortescue to $10.20 from $9.30 a share.
