I would only sell my Fortescue shares if this happened

I'm optimistic on Fortescue's future, but there are situations where I'd sell.

| More on:
a man sits in unhappy contemplation staring at his computer on his desk in a home environment, propping his chin on his hand.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Fortescue is one of the holdings in my portfolio
  • Currently, I’m planning to own it for the long term
  • However, there may be certain situations where I decide to sell, such as a demerger

Fortescue Metals Group Limited (ASX: FMG) shares are an important part of my portfolio. I have previously outlined why I decided to buy the company's shares and how long I plan to hold them.

Currently, I'm receiving a large dividend from the S&P/ASX 200 Index (ASX: XJO) mining share. This is because Fortescue is generating significant net profit after tax (NPAT) and cash flow, enabling it to pay a juicy dividend to shareholders and continue to invest in its green division, Fortescue Future Industries (FFI).

Over the long term, I'm hoping that Fortescue can generate sizeable profits from the production and sale of products such as green hydrogen, green ammonia, green iron, and advanced batteries.

However, there are a few situations where I could see myself selling my Fortescue shares — or at least thinking about it.

Demerger

It was recently in the news that Fortescue chair Andrew Forrest revealed that Fortescue Future Industries may already be worth US$20 billion. This is "if solicitations from investment banks for an initial public offering (IPO) of the division were any guide to its valuation", as reported by the Australian Financial Review.

Shareholders would probably realise significant value from a Fortescue demerger because it would mean that investors could properly value FFI and the company's mining segments separately. It wouldn't surprise me if some investors who just wanted the mining segment were unenthusiastic about getting FFI as part of the deal, so the combined value of the two businesses could rise on a demerger.

However, if I were left with Fortescue shares and FFI shares, I would very likely sell shares of the mining business.

There would also be a major question of how Fortescue Future Industries would fund its green endeavours. At the moment it gets 10% of Fortescue's NPAT each year, plus access to the sizeable balance sheet.

I think Fortescue is better off staying a combined business for the long term.

Stopped paying dividends

Dividends aren't everything with investing, but I like the investment income because of the additional cash flow it provides into my bank account for whatever purpose I decide, including re-investment into other opportunities.

Every single one of my holdings pays dividends, though I'm searching for total returns from my portfolio, not just dividends.

If Fortescue did stop paying dividends then I would need to evaluate how long the dividends were going to be halted and why. Would it have stopped because its financial position is in danger and it's overloaded with debt? Or is it investing all available dollars into the green FFI opportunity, which could pay off in the long run?

It wouldn't be a definite thing I'd sell in this situation, but I'd certainly think about it.

China stops buying Australian iron ore

For me, this is the biggest risk facing Aussie miners. If China stopped buying Australian iron ore, it would make me evaluate my holding of Fortescue shares.

China reportedly buys a sizeable majority of the global iron ore production each year. What would happen if China stopped buying Aussie iron? We have seen how it was willing to put tariffs on a number of other Australian exports, such as wine.

China has continued to buy Australian iron ore. It has been dependable during the COVID-19 pandemic, it's geographically closer to China than Brazil is, and there isn't really a replacement option (at this stage).

However, China is reportedly working on a plan to reduce its dependency on iron ore, according to reporting by the Australian Financial Review. African iron ore could become a competing force as well. Fortescue itself is looking to start an African iron ore project which could mitigate some future issues for Fortescue.

Finally, what would happen if China decided to invade Taiwan? That is definitely not a certain event — and I hope it never happens — but it has crossed my mind what the geopolitical and economic consequences of that could mean for Fortescue's biggest customer.

Foolish takeaway

I'm planning to hold my Fortescue shares for years, perhaps decades, but I think it's a good idea to assess some situations before they happen, where it's possible I may want to sell.

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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 Scott Phillips.

More on Resources Shares

a sad looking engineer or miner wearing a high visibility jacket and a hard hat stands alone with his head bowed and hand to his forehead as he speaks on a mobile telephone out front of what appears to be an on site work shed.
Resources Shares

Down 14% in 2024, why is the BHP share price sliding again today?

ASX 200 investors are bidding down the BHP share price on Wednesday.

Read more »

A mining employee in a white hard hat cheers with fists pumped as the Hot Chili share price rises higher today
Resources Shares

These ASX 200 mining stocks could rise 40% to 50%

Analysts think these miners are dirt cheap at current levels.

Read more »

Image from either construction, mining or the oil industry of a friendly worker.
Resources Shares

Fortescue share price leaps 5% as electric machinery makes a milestone

Fortescue is charging ahead with its electric mining ambitions.

Read more »

rising mining asx share price represented by happy woman miner in hard hat
Resources Shares

Why the BHP share price crushed the benchmark this week

BHP shareholders enjoyed a rewarding week.

Read more »

A man wearing a hard hat and high visibility vest looks out over a vast plain where heavy mining equipment can be seen in the background.
Dividend Investing

Here is the profit forecast to 2026 for BHP shares

Let’s unearth how much profit this miner could make.

Read more »

Female miner standing next to a haul truck in a large mining operation.
Resources Shares

Is the worst of the selling now over for ASX iron ore shares?

ASX iron ore giants like BHP, Rio Tinto and Fortescue rebounded this week after falling hard in 2024.

Read more »

Three satisfied miners with their arms crossed looking at the camera proudly
Resources Shares

Why are ASX 200 mining shares smashing the benchmark on Wednesday?

Rio Tinto, BHP and Fortescue shares are all charging higher today.

Read more »

Two miners standing together.
Resources Shares

Why is the South32 share price getting battered today?

ASX 200 investors are bidding down South32 shares today.

Read more »