Could the Fortescue Metals Group Limited (ASX: FMG) share price be a buy with its 22% grossed-up dividend yield?
The iron ore mining giant has had a volatile time over the last six months. The share price was below $20 six months ago and again towards the end of March 2021. The Fortescue share price has been above $24 in May, February and January 2021.
In recent weeks the iron ore price and Fortescue shares have both been declining on concerns about increasing global supply of iron ore, particularly from Brazil. China also doesn't want to pay too much for the iron ore that it's buying, with demand possibly set to ease.
How is Fortescue performing?
The mining giant continues to achieve high levels of shipments. In the FY21 third quarter, it saw iron ore shipments of 42.3 million tonnes, which was in line with record third quarter shipments last year. Year to date shipments of 132.9mt was 2% higher than the comparable period in FY20.
At the current iron ore price, it is generating a high profit margin. In the third quarter of FY21, the average revenue was US$143 per dry metric tonne. This compared to the C1 cost of US$14.90 per wet metric tonne (wmt).
It's still producing a lot of resources at a high profit margin.
Balance sheet and dividend
At 31 March 2021, it finished the quarter period with net debt of US$1 billion after the US$3.5 billion payment of its interim dividend.
It has recently improved its capital structure with the issue of US$1.5 billion of senior unsecured notes to refinance debt, extend the debt maturity profile and lower the cost of capital.
Fortescue Future Industries (FFI)
The mining company has recently revised its target to achieve carbon neutrality by 2030, ten years earlier than the previous target.
FFI is an important part of that goal. It's assessing renewable energy and green hydrogen opportunities globally, as well as green ammonia projects.
It's developing a ship design powered by green ammonia and trialling that design in new ammonia engine technology at scale.
The business is testing large battery technology in Fortescue's haulage trucks. It's trialling hydrogen fuel cell power for Fortescue's drill rigs. Fortescue is trialling technology on Fortescue's locomotives to run on green ammonia.
Finally, it's conducting trials to use renewable energy in the Pilbara region to convert iron ore to green iron at low temperatures, without coal.
A 22% dividend yield?
There are large expectations for the Fortescue dividend in FY21.
The broker Credit Suisse believes that Fortescue could pay a full year dividend of $3.46 per share, which would translate to a grossed-up dividend yield of 22%.
Some brokers that the dividend could be much bigger. One of the most optimistic is Ord Minnett's FY21 dividend forecast of $4.44 per share – that would be a grossed-up dividend yield of 28.7% for the year.
However, the dividend is then expected to materially reduce in FY22.
Is the Fortescue share price a buy?
Credit Suisse currently rates Fortescue shares as a buy with a price target of $23.
Other price targets are less optimistic. The UBS price target is US$18, with an expectation that the price of iron ore is going to drop over the coming months and drop a bit more over the next couple of years as Chinese demand decreases but international supply increases. That's why its rating is currently hold/neutral on the iron ore giant.
Using UBS' FY22 forecast, the Fortescue share price is valued at 8x FY22's estimated earnings.
