Why has the Fortescue share price been having such a rough trot lately?

The Fortescue Metals Group Limited (ASX: FMG) share price has been seeing red in September. Since the end of August, it has dropped 6%.

The ASX has experienced a lot of volatility in recent months as investors get used to strong inflation and higher interest rates.

Not only can Fortescue be affected by general ASX share market volatility, but it’s also exposed to the ups and downs of the iron ore price.

Plus, it just announced its plan for decarbonisation.

Why would the iron ore price matter?

Fortescue is one of the biggest commodity companies on the ASX.

Changes in the commodity price can have a big effect on the profit. It costs businesses virtually the same amount to mine 1 million tonnes (mt) of iron ore. So, a higher iron ore price translates into higher revenue. But it would particularly translate into extra profit, aside from paying more to the government.

With Fortescue committing to a high dividend payout ratio, the higher profit is largely turned into higher cash returned to investors as well.

But, the opposite is true when iron ore prices fall — lower revenue, much lower profit and smaller dividends. This is what we saw in the FY22 result, revenue dropped 22%, the net profit after tax (NPAT) fell 40%, free cash flow fell 60% and the total dividend dropped 42% to $2.07 per share.

The iron ore price has been drifting lower over the last few weeks and months, dropping to around US$99 per tonne.

Ex-dividend

Another thing that has happened this month is that Fortescue shares went ex-dividend. This means that new investors are no longer entitled to the FY22 final dividend of $1.21 per share. That dividend alone equates to a grossed-up dividend yield of 10%.

Fortescue pays such a large dividend that losing access to its recent dividend is a material loss for investors. Indeed, the cash element of the dividend (excluding the franking credits) could explain most of the decline.

This expert is still positive on Australian miners

There are concerns about China’s economy, which could have an important influence on the iron ore price and the Fortescue share price considering how much iron ore it buys.

Wealth manager Ken Fisher wrote this in The Australian:

So how might you calibrate a slow, low-growth China? With Chinese GDP of $23 trillion – behind only America – it now grows off a huge base, contributing more to global economic activity than smaller, faster-growing China did in decades past. So 2007’s 14.2% growth added notably less to GDP in yuan-denominated activity than 2019’s 5.9%.

China growth fears are a subset of the 2022 worldwide sentiment swoon rendering expectations unrealistically bleak. Sentix’s global economic expectations gauge is at its lowest since January 2009 – the GFC’s depths. Headlines trumpet recession fears. Yet global economies are muddling through with mixed data. Very little suggests a deep downturn.

Inflated China fears have stalked Australian stocks for years. But remember: False fears are bullish, always and everywhere. So is depressed sentiment. Don’t let today’s gloomy headlines scare you from the coming recovery.

The post Why has the Fortescue share price been having such a rough trot lately? 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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