Is the Fortescue share price a buy for its 16% dividend yield?

A woman looks quizzical while looking at a dollar sign in the air.A woman looks quizzical while looking at a dollar sign in the air.

The Fortescue Metals Group Limited (ASX: FMG) share price could be a consideration given how large of a potential dividend yield the ASX mining share is going to pay in FY22.

Fortescue is one of the world’s largest iron ore miners, alongside BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO). It has a few different mining hubs in Australia including Chichester, Solomon, and Western.

The relatively high dividend payout ratio of the business and relatively low price-to-earnings (p/e) ratio means that it normally has a large dividend yield.

How big is the Fortescue dividend going to be in FY22?

Each analyst has a different view on how large the Fortescue dividend yield will be in the current financial year.

Based on the forecast on Commsec, Fortescue could pay a grossed-up dividend yield of 14%.

However, one of the latest brokers to have their say on Fortescue has been Credit Suisse, which has estimated a grossed-up dividend yield of 16% in FY22 and then 18.4% in FY23.

One of the reasons for the large dividend expectations is that the iron ore price has been higher than at the end of 2021.

Credit Suisse is expecting the iron ore price to remain stronger for longer because of lower production by the large miners, which is affecting the relationship between global supply and demand. The broker thinks Fortescue’s lower grade iron ore will see a smaller discount compared to higher grade iron in the coming months.

In the first half of FY22, Fortescue declared a fully franked interim dividend of 86 cents per share, representing a dividend payout ratio of 70% of the net profit after tax (NPAT).

Is the Fortescue share price a buy?

For Credit Suisse, the broker is currently ‘neutral’ on the business, with a price target of $20. That implies a small potential rise over the next year on the current price of $19.01.

Other brokers have less optimistic price targets. For example, Morgan Stanley currently has an ‘underweight’ rating on the business with a price target of just $15.95. It noted the increasing cost of Iron Bridge – this is the project Fortescue is involved in that will produce high-grade iron ore.

Some analysts are also focusing on the large potential cost of the projects that Fortescue Future Industries (FFI) is working on, including green hydrogen. FFI is the green segment of Fortescue that is trying to decarbonise Fortescue and help reduce emissions in sectors that are hard to decarbonise. The uncertainty of the costs is seen as a negative.

FFI also recently acquired a high-performance battery business called Williams Advanced Engineering. Fortescue said this business “provides critical technology and expertise in high-performance battery systems and electrification to increase Fortescue’s operational efficiency, lower maintenance costs, and accelerate the decarbonisation of its mining operations”.

WAE will also be a “significant” new global battery growth business for Fortescue, according to the company.

Fortescue share price snapshot

The Fortescue share price has fallen by 4% since the start of the 2022 calendar year and by 19% over the past 12 months.

The post Is the Fortescue share price a buy for its 16% dividend yield? appeared first on The Motley Fool Australia.

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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.

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