Will Fortescue (ASX:FMG) shares really pay an 18% dividend yield in FY21?

By some projections, Fortescue Metals Group Limited (ASX:FMG) shares could pay an 18% dividend yield in FY21. Is that possible?

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At the current share price, Fortescue Metals Group Limited (ASX: FMG) is projected by some analysts to pay a grossed-up dividend yield of 18% in FY21.

The large iron mining business just reported its FY21 half-year result which included a dividend of $1.47 per share. That dividend alone amounts to a grossed-up yield of 8.4% from Fortescue. But there are analysts out there that think there could be another big dividend with the annual report in six months.

But before we get to that, let鈥檚 look at what Fortescue just reported.

Fortescue鈥檚 half-year result

In the six months to 31 December 2020, Fortescue sold 90.2 Mt of iron ore, which was 3% higher than the prior corresponding period. The realised price of that ore jumped 42% to US$114 per dry metric tonne (dmt).

The higher iron ore price and increased volume sold led to Fortescue鈥檚 revenue rising by 44% to US$9.3 billion.

With the benefit of higher prices and a continued focus on cost management through productivity and innovation, Fortescue was able to increase its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin by six percentage points to 71%. This helped underlying EBTIDA rise by 57% to US$6.6 billion.

Net profit after tax (NPAT) rose by 66% to US$4.08 billion. Looking at earnings per share (EPS) in Australian dollar terms, it rose by 58% to $1.84.

Operating cashflow grew by 42% to US$4.4 billion and free cashflow rose 12% to US$2.5 billion.

Fortescue鈥檚 net debt is down to just US$110 million, down from US$258 million at 30 June 2020. The gross debt still stands at US$4.1 billion and the cash balance is US$4 billion.

Whilst the $1.47 dividend per share declared by the board represented a payout ratio of 80% of net profit, it also said what it鈥檚 going to do with the other 20%.

It has established Fortescue Future Industries (FFI) to identify projects in the renewable energy and green hydrogen sectors. Projects have been identified in both Australia and globally.

Fortescue said it鈥檚 going to leverage its successful track record of identifying, assessing, and developing large-scale resource and infrastructure opportunities. The company said it will bring its demonstrated capability of adopting innovation and technology to ensure future green energy projects will position Fortescue at the forefront of this emerging industry.

The company will allocate 10% of its net profit to fund renewable energy growth with FFI. The other 10% will fund other resource growth opportunities.

Is that huge dividend yield possible?

It depends which projections you look at. Commsec has estimated that Fortescue can generate EPS of $3.61 per share in FY21, and that it will pay an annual dividend per share of $3.10. That would equate to the grossed-up dividend yield of almost 18%.

Broker Morgans has previously estimated that Fortescue could pay an even bigger dividend, of around $3.31 per share, with EPS of $4.14 for FY21.

But broker Macquarie Group Ltd (ASX: MQG) doesn鈥檛 think that the Fortescue dividend will be as big as the above estimates, with a projected FY21 dividend per share of $2.04. That鈥檇 be a grossed-up dividend yield of 11.7%, which is still materially above 10%.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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