The Fortescue Metals Group Limited (ASX: FMG) share price continued its positive run on Thursday.
The iron ore giant’s share rose 3% to $21.13, bringing its year to date gain to approximately 10%.
Can the Fortescue share price keep rising?
Unfortunately for shareholders, one leading broker believes the Fortescue share price has significant downside risk from current levels.
According to a recent note out of Goldman Sachs, its analysts have a sell rating and $13.50 price target on its shares.
Based on the current Fortescue share price, this implies potential downside of 36% for investors over the next 12 months.
Why is the broker bearish on Fortescue?
There are a number of reasons that Goldman Sachs is bearish on Fortescue. One is its valuation, which it believes is significantly stretched in comparison to its larger peers.
Another reason is the Fortescue Future Industries business, which the broker appears to believe the market is too excited about.
In fact, its analysts believe this business will drag on the company’s finances in the coming years and force it to make cuts to its dividend payout ratio.
Goldman commented: “FMG is targeting a 10% allocation of NPAT to Fortescue Future Industries (FFI) renewable energy projects (green hydrogen, solar, wind, etc) but only when a project is investment ready. Other possible renewable projects FMG has spoken about are further solar investments and also wind investments in the Pilbara to decarbonize the mining fleet, and other green hydrogen projects with a focus on offshore water hydro & wind/solar resources.”
“We think decarbonising the Pilbara could cost FMG over US$7bn and requires +US$50/t carbon or a green premia to be NPV positive. FMG has outlined that the Pilbara decarbonisation project/assets would logically sit within FFI (although ultimately under a Power Purchasing Agreement (PPA) which would still be reflected on FMG’s balance sheet). In order to fund FFI projects, we think FMG will need to reduce their dividend payout ratio from 80% to 50% from 2022 onwards.”
It is for this reason, together with its forecast for softening iron ore prices over the coming years, that Goldman is forecasting dividends of just 51 US cents per share in FY 2023 and FY 2024 and then 34 US cents per share in FY 2025 and FY 2026.
Based on the current Fortescue share price, this will mean yields of 3.4% and then just 2.2%. These are certainly not the generous yields that investors have become accustomed to over the last couple of years.
The post Why this broker thinks the Fortescue (ASX:FMG) dividend will come under significant pressure appeared first on The Motley Fool Australia.
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