Fortescue Metals Group Limited (ASX: FMG) has been an S&P/ASX 200 Index (ASX: XJO) favourite for investors over the last year or so. At the time of writing, the Fortescue share price is trading at $20.06.
Buoyed by rising iron ore prices, Fortescue shares have risen by more than 90% over the past 12 months. And that’s after falling 22% since early January.
But it gets even better for long-term investors. Over the past 5 years, Fortescue shares are up a staggering 683%. Not bad for a blue-chip iron miner.
But even after the massive run up of the past year, Fortescue today offers a trailing dividend yield of 12.31%. And that comes fully franked to boot. If you include the value of these franking credits, this dividend grosses-up to an almost-inconceivable 17.59%.
So let’s, er, dig a little deeper here.
An ASX dividend giant
Fortescue’s last two dividend payments were a $1.47 per share interim dividend that was paid on Wednesday, and a $1 per share final dividend that was paid out on 2 October 2020. For some context, the two dividends before that were an interim dividend of 76 cents per share, and a final dividend of 24 cents per share.
So there has been a massive ramp up over the past 2 years. This large gap can be easily explained by looking at Fortescue’s policy when it comes to dividends.
Fortescue has what’s called a ‘payout ratio’ dividend policy. Its official position, which the company reiterated in its latest earnings report, is to payout 50% to 80% of full-year net profits after tax (NPAT), targeting the top end of the range. For the first half of the 2021 financial year (1H21), Fortescue’s NPAT came in at US$4.08 billion, which was a massive increase on 1H20’s figure of US$2.45 billion.
The dividend of $1.47 per share represented 80% of that NPAT figure for 1H21. So right at the top of the range. It was also the highest dividend Fortescue has ever paid its shareholders.
Will the Fortescue dividend survive?
So, some takeaways here. Firstly, as an iron ore miner, Fortescue is completely at the mercy of the iron ore price. The monstrous dividend of $1.47 a share was possible because of historically high iron ore prices over the past year. As this dividend was at the upper range of Fortescue’s payout ratio, it will need to bring in at least a very similar level of profits in the future to maintain a dividend near this level.
But this might not be a challenge for the company, at least in the short term. In its earnings report, Fortescue told us that its average realised price per dry metric tonne was US$114. Today, the iron ore price is US$155.60 a tonne, which is actually on the lower end of its recent range. It was over US$172 a tonne as recently as 8 March.
In all likelihood, the current heights of the Fortescue dividend won’t last forever, given how volatile the price of iron ore has historically been. But on the other hand, the dividend looks pretty safe in the short- to medium-term, judging by the metrics we have discussed. This is certainly an interesting ASX dividend share to keep an eye on!
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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