Why the best dividend days may be over for Fortescue shares

I'm not expecting huge payouts from Fortescue in the future.

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Fortescue Ltd (ASX: FMG) shares have been known for huge dividend payouts in the last few years. The outlook for big dividends in the future is not strong, in my opinion.

The ASX iron ore share took full advantage of the elevated iron ore price in FY21, leading to an annual dividend per share of $3.58.

In FY22, the annual dividend per share was reduced to $2.07.

Can the Fortescue dividend recover to above $3 per share? I don't think it will, for a few different reasons.

Increasing iron ore supply

The key factor enabling Fortescue to generate such a large profit and pay a big dividend in FY21 was the strong iron ore price.

Strong demand from China outstripped supply, leading to a higher commodity price.

I'm not sure the supply and demand equation will work as strongly as it did in Fortescue's favour in the future.

The Chinese real estate sector is still struggling, so I don't see this key iron ore user pushing up the iron ore price again like it did. India could be a big user of steel in the coming years, but it's unlikely to be on the same scale as China.

On the supply side, a significant increase in iron ore mining could be a headwind for the iron ore price. In Africa, Rio Tinto Ltd (ASX: RIO) is part of the huge Simandou iron ore project, and Fortescue Ltd (ASX: FMG) is working on a project in Gabon.

Rio Tinto, Fortescue and BHP Group Ltd (ASX: BHP) all want to increase their production in Australia.

Lower dividend payout ratio

The Fortescue dividend payout ratio has been trending downwards, which means Fortescue is holding onto a larger proportion of its generated profit.

In FY21, Fortescue had a dividend payout ratio of 80%, which fell to 75% in FY22 and then 65% in both FY23 and the first half of FY24. A lower payout ratio obviously means smaller dividends for owners of Fortescue shares.

The business has an important reason to hold onto more of its cash – it has huge green energy ambitions related to green hydrogen, green ammonia, industrial batteries and more. It will need a lot of capital to realise its goals, even if it is successful at bringing on investment partners.

Even if Fortescue were making big enough profits to pay a $3 per share dividend, I don't think it would be that generous with its dividend in the future because of the capital requirements.

Fortescue dividend projections

The estimate on Commsec for the Fortescue dividend per share in FY24 is $2.02, followed by $1.50 in FY25 and then sinking to $1.08 per share in FY26.

It's possible the iron ore price may be stronger than expected in the medium term, as it was in FY21 and at the start of this year when it was above US$140 per tonne. But shareholders such as myself should be aware that the payout may not be as rewarding in the future.

Motley Fool contributor Tristan Harrison has positions in Fortescue. 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.

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