Why I’m not worried about Fortescue’s $9.6 billion decarbonisation plans smashing my dividends

Fortescue Metals Group Limited (ASX: FMG) shares are recognised as a way to get exposure to iron ore. As well, the Fortescue dividend yield has also been one of the largest in the S&P/ASX 200 Index (ASX: XJO) over the last few years.

However, some analysts are concerned the Fortescue dividend could be headed lower in the coming years.

It’s certainly true that the ASX mining giant is looking to spend a lot of cash on decarbonisation in the years ahead.

A month ago, the company revealed a plan for a US$6.2 billion capital investment to eliminate fossil fuels from its business. The idea is to achieve “real zero terrestrial emissions” (scope 1 and 2) across its iron ore operations by 2030.

Why is Fortescue doing this?

The iron ore giant said that it will eliminate the company’s fossil fuel risk profile, enabling it it to supply its customers with a carbon-free product.

The move is expected to help it lead the market in terms of response to growing customer, community, and investor expectations to reduce carbon emissions.

By 2030, the business is expecting to avert three million tonnes of carbon dioxide (CO2) equivalent emissions per year.

But it’s not just a ‘green’ move. It’s also expected to lead to significant operating cost savings. From 2030, Fortescue is expecting net operating cost savings of US$818 million per annum, costed on prevailing market prices of diesel, gas, and Australian carbon credit units.

By 2030, cumulative operating cost savings are expected to be US$3 billion, with a payback of capital by 2034 at current market prices.

The company said its move will also remove fossil fuel price volatility risks, as well as price risks associated with relying on carbon offsets. Further, it will eliminate risks associated with carbon tax regulation, according to management.

Why I’m not particularly concerned about the Fortescue dividend

There’s no doubt there is a big price tag with this plan. But, I think it’s worth noting a number of things.

First, there are long-term economic (cost) benefits to the plan. The wind and sun don’t cost anything to use each day. Certainly, I want my ASX shares’ management to think about, and invest for, the long term. To me, this seems like a good long-term move.

Second, there are many benefits to going green. Some might say it’s essential for our future that the biggest carbon emitters reach net zero. Fortescue may also be able to achieve a higher price for its iron by being able to supply customers with a carbon-free product. The resources giant also pointed out there is a “significant” new green growth opportunity through the commercialisation of decarbonisation technologies. Plus, the company noted its plan ensures future access to green-driven capital markets.

Third, the timing of the spending is largely planned for between FY24 to FY28. The biggest three years of spending, by far, will be FY25, FY26, and FY27. Fortescue said the costs to purchase its green mining fleet will be aligned with its scheduled asset replacement life cycle and included in its sustaining capital expenditure. In other words, an important portion of the overall spending was going to go towards new vehicles regardless, it’s just that they will be green(er).

In terms of the dividend, I think it’s very likely that the dividend will fall compared to the last two years. But, I put that expectation down to the reduction of the iron ore price in recent months. The commodity price is a key factor for generating revenue and profit for the company. If Fortescue’s profit and dividend were going to stay at FY21 levels for many years, the Fortescue share price may have gone substantially higher.

Volatility is normal

That’s one of the things to know about a cyclical business like this iron ore miner – there will be booms, but also leaner times. Supply and demand play an important role. But both supply and demand can each see volatility.

I think that the times when the iron ore price and Fortescue share price fall significantly could be opportunistic times to invest, but not when the iron ore price is high.

Plus, I like the long-term outlook for Fortescue with its plan to diversify earnings by producing green hydrogen through its Fortescue Future Industries (FFI) division. When that’s up and running, it could make profit and fund part of future dividends.

The post Why I’m not worried about Fortescue’s $9.6 billion decarbonisation plans smashing my dividends 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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