Here's why Morgans is forecasting 22% downside for the Fortescue share price

Why is this broker predicting a fall for the ASX 200 mining share?

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The Fortescue Metals Group Ltd (ASX: FMG) share price is 0.29% lower on Thursday at $20.72.

One top broker thinks the ASX 200 mining giant has a long way further to fall.

Let's take a look.

Morgans tips 22% fall in Fortescue share price

Morgans has a reduce recommendation on Fortescue and a $16.20 share price target.

This means it's expecting about a 22% fall in the Fortescue share price over the next 12 months.

Analyst Jabin Hallihan explains on The Bull:

The company is a strong producer, shipping 192 million tonnes in fiscal year 2023. But we need more clarity about its future strategy and capital allocation framework as it transitions to a greener energy company.

Many investors feel concerned about what it's going to cost for Fortescue to transition from an iron ore pure-play company to a green energy and technology company.

Capital allocation is one concern, dividends are another.

Will Fortescue dividends fall, too?

Morgans makes no comment about dividends, however, Fortescue has a reputation as a generous payer.

The company has a dividend policy of paying 50% to 80% of full-year net profit after tax (NPAT).

But some investors worry that if profit margins are eroded by massive investment in brand new green projects in the short to medium term, this may lead to less passive income for them.

Examples of recent investment include Fortescue taking the lead investor role in Electric Hydrogen's US$380 million Series C funding round.

'Inflection point' on capital allocation

After Fortescue released its FY23 results in August, another top broker, Goldman Sachs predicted a more than 50% cut to the Fortescue dividend in FY24.

Goldman is tipping a dividend of 54 US cents per share in FY24 and 36 US cents in FY25. 

The broker commented:

We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company raises ~US$6bn of new debt, reduces the dividend payout ratio from the current ~65% in 2H FY23 to ~50% from FY24 onwards (bottom end of the 50-80% guidance range), and increases gross gearing to >30% by FY27 (in-line with the company's target of 30-40%).

On top of this, Goldman predicts a weaker iron ore price between now and 2026, which will obviously impact Fortescue's revenue.

Goldman is forecasting:

  • Q4 of 2023: US$90 a tonne
  • 2024: US$93 a tonne
  • 2025: US$85 a tonne
  • 2026: US$84 a tonne

Fortescue previously adopted a policy of allocating 10% of NPAT from its iron ore operations to investment in its Fortescue Future Industries division (FFI) but dropped that policy this year.

Instead, FFI projects will be assessed "on their own merits" as per the company's broader capital allocation framework, as we reported in August.

Fortescue share price snapshot

Fortescue shares are up 1.7% in the year to date and up 18% over the past 12 months.

Motley Fool contributor Bronwyn Allen has positions in Fortescue Metals Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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.

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