Fortescue Metals Group Limited (ASX: FMG) is a significant dividend payer. The 2022 dividend isn't predicted to be as big as the 2021 dividend, but how big will it be?
Fortescue is one of the world's biggest iron ore mining companies, alongside peers such as Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP).
FY21 saw the business pay out a $3.58 dividend per share, up 103% from $1.76, after generating US$10.3 billion of net profit after tax (NPAT), which was up 117% from the previous year.
At the current Fortescue share price, the FY21 annual dividend translates to a grossed-up dividend yield of 26.5%.
What do we know about Fortescue's 2022 dividend so far?
Fortescue has a capital allocation framework and a stated intent to target the top end of its dividend policy to pay out 50% to 80% of full-year net profit after tax. In FY21 it had a dividend payout ratio of 80%, and in FY20 the dividend payout ratio was 77%.
In the FY22 half-year result, the interim dividend was cut by 41% to 86 cents per share. This represented a dividend payout ratio of 70%, which was a reduction from the 80% payout ratio in the first half of FY21.
While a reduction in the payout ratio was partly responsible for the dividend reduction, Fortescue also suffered a 32% drop in net profit after tax to $2.8 billion in the first six months of FY22.
In HY22, the amount of ore shipped and sold increased (by 3% and 2%, respectively), but the average revenue per dry metric tonne of iron ore fell 16% to US$95.58. The C1 cost (the 'direct' production costs of iron ore) increased by 20% to US$15.28 per wet metric tonne.
So, the market has already a significant cut. But what are analysts expecting with the dividend?
Dividend expectations
Commsec currently has an estimate of an annual dividend of $1.74 in FY22 from Fortescue. At the current Fortescue share price, that would translate into a grossed-up dividend yield of 12.9%.
There are some estimates out there that are both larger and smaller than Commsec's. Morgans' FY22 dividend estimate for the miner puts the grossed-up dividend yield at 14.25%.
However, the Credit Suisse annual dividend estimate puts the Fortescue grossed-up dividend yield at 11.5%.
While the estimates are quite varied, all of them seem to suggest that the FY22 annual dividend yield will be more than 10%.
Is the Fortescue share price a buy?
Brokers' recommendations are mixed on the company at the moment.
Credit Suisse calls it a sell ('underperform'), with a price target of just $14 because it seems expensive compared to other miners.
Ord Minnett rates it a hold with a price target of $21. It recognises the strong price that iron ore miners are seeing.
Morgans also rates the Fortescue share price as a hold, with a price target of $19.10.
