Fortescue Metals Group Limited (ASX: FMG) shares are one of the biggest dividend payers within the S&P/ASX 200 Index (ASX: XJO). But, a large dividend yield is one thing. How reliable is the dividend from Fortescue stock going to be next year?
Reliability, to me, means being able to at least maintain, or perhaps grow, the dividend compared to last year.
It's a tough challenge for ASX iron ore shares to maintain their dividend.
Dividends are paid out of profits. Iron ore miner profits are heavily linked to the iron ore price. The iron ore price is linked to demand from China.
Can Fortescue stock keep paying good dividends?
In FY22 the business paid an annual dividend per share of $2.07 per share. This represented a dividend payout ratio of 75% of net profit after tax (NPAT).
Fortescue's FY22 dividend was cut by 42% compared to the FY21 total dividend per share of $3.58 per share, which was 80% of NPAT.
The ASX iron ore miner's dividend policy is to target the upper end of a payout range of between 50% to 80% of NPAT.
In FY23, Commsec numbers suggest that Fortescue is going to generate earnings per share (EPS) of $2.04. The dividend projection for FY23 on Commsec at the moment is $1.44. This would represent a dividend payout ratio of 70.6%. It would also mean that the grossed-up dividend yield is 9.9%.
But, it would represent a decline of around 30% compared to FY22.
Even if Fortescue paid a dividend that equates to a dividend payout ratio of 80% of the projected FY23 EPS, it would be an annual dividend per share of $1.632, which would represent a cut of 21%.
In other words, the earnings projections are suggesting that a Fortescue dividend cut seems likely.
Is there a chance that the prediction is wrong?
Investors weren't expecting the iron ore price was going to go above US$200 in 2021, yet it did.
The iron ore price could perform better than investors are expecting, particularly if the reopening of China goes well. China is steadily lifting its COVID restrictions and slowly to a 'COVID normal' setting.
If economic activity and construction activity goes better than expected in China, then that could be a very useful tailwind for the earnings and dividend. However, I'm not sure how much further the iron ore price can climb in the short term. Time will tell how things go with the price.
FY24 dividend prediction
2023 is just one year, what does the following year have in store?
Commsec numbers suggest another dividend decrease. In FY24, Fortescue could pay an annual dividend per share of $1.14. This would translate into a grossed-up dividend yield of 7.8%.
Essentially, analysts are expecting that the Fortescue dividend is going to go downhill.
