The Fortescue Metals Group Limited (ASX: FMG) dividend has been a favourite of income investors in recent years.
Thanks to sky high iron ore prices, the mining giant has been rewarding shareholders handsomely with payouts.
But will this continue in the future? Let's take a look at one leading broker is forecasting for the Fortescue dividend through to FY 2024.
Where is the Fortescue dividend heading?
Unfortunately, the team at Goldman Sachs believe that the Fortescue dividend is now on a downward trajectory.
In FY 2021, the company paid shareholders a fully franked A$3.58 per share dividend. This was double the A$1.76 per share dividend that it rewarded shareholders with a year earlier in FY 2020.
Unfortunately, Goldman Sachs is expecting the Fortescue dividend to be back down to almost 2020 levels in FY 2022.
It is forecasting a fully franked US$1.29 (A$1.85) per share dividend this year. Though, it is worth noting that this will still be an above average yield. Based on the current Fortescue share price of $18.25, this will mean a fully franked yield of 10.1%.
What's next?
Goldman is expecting the dividend cuts to continue in FY 2023. It is expecting the Fortescue dividend to be reduced to 73 US cents (A$1.05) per share. This would mean a fully franked dividend yield of 5.75% for investors.
The cuts are expected to continue in FY 2024, with the broker forecasting a further decline to 42 US cents (60 Australian cents) per share for that financial year.
Based on the current Fortescue share price, this will mean a fully franked dividend yield of approximately 3.3% in FY 2024.
Why the cuts?
As well as forecasting a softening benchmark iron ore price from an average of US$120 per tonne in 2022 to US$80 per tonne in 2024, the broker believes Fortescue's decarbonisation plans and the Fortescue Futures Industries business will weigh on its free cash flow.
Goldman commented:
We think decarbonising the Pilbara could cost FMG over US$7bn and requires +US$50/t carbon or a green premia to be NPV positive. FMG has outlined that the Pilbara decarbonisation project/assets would logically sit within FFI (although ultimately under a Power Purchasing Agreement (PPA) which would still be reflected on FMG's balance sheet). In order to fund FFI projects, we think FMG will need to reduce their dividend payout ratio from 80% to 50% from 2022 onwards.
The broker has a sell rating and lowly $13.20 price target on the Fortescue share price.
