Can shareholders have bigger dividends AND more spending on Fortescue Future Industries?

One of the interesting aspects about Fortescue Metals Group Limited (ASX: FMG) shares is its green division called Fortescue Future Industries (FFI). It has big green hydrogen production goals and Fortescue also pays a big dividend.

Getting involved in a new industry is unsurprisingly going to take a lot of money and investment.

But, Fortescue is also known as one of the biggest dividend payers in Australia and on the ASX.

How is it going to keep the money flowing to its green initiatives and to shareholders? It’s a tricky conundrum. Is it possible to fund both?

What is the current split of Fortescue’s money?

Fortescue has set up a ratio of how much money it wants to allocate to FFI and how much it plans to pay as dividends to shareholders.

The ASX mining share’s policy is to have a dividend payout ratio of between 50% and 80% of full-year net profit after tax (NPAT).

In the FY22 half-year result it paid a fully-franked interim dividend of 86 cents per share. That represented a dividend payout ratio of 70% of the FY22 half-year net profit.

The capital allocation for Fortescue Future Industries is that 10% of Fortescue’s net profit after tax will go towards FFI.

So, even if Fortescue paid an 80% dividend payout ratio and 10% of profit towards FFI, it would still have 10% of its annual net profit to work with. However, the question is whether 10% of net profit will be enough to fund all of FFI’s ambitions. The volatility and long-term price action of iron ore could also be a factor.

The Australian reported on recent comments from Macquarie. The broker said there may be “increased scrutiny on capital allocation to FFI given earnings headwinds from soft iron ore prices”. Macquarie also said:

To date, FFI has underspent versus its 10% allocation from group earnings, with US$728m unutilised at the end of FY22. We note the FFI guidance is US$600-700m for FY23. However, we believe the weakness in iron ore prices could constrain FFI’s budget beyond the near term.

What is FFI doing with the money?

Fortescue Future Industries aims to take a global leadership position in green energy and green technology.

One of its first key projects as a global green energy manufacturing centre is in Queensland. The project is an electrolyser manufacturing facility in Gladstone, with an initial capacity of 2GW per annum.

It’s looking to convert the Gibson Island ammonia facility to green hydrogen power, in partnership with Incitec Pivot Ltd (ASX: IPL).

Fortescue Future Industries is also looking to repurpose coal infrastructure at AGL Energy Limited (ASX: AGL)’s Hunter Valley Liddell and Bayswater coal-fired power stations.

It’s also working on green energy projects in a number of countries including Papua New Guinea, Indonesia, New Zealand and Germany.

FFI is working on decarbonising Fortescue’s operations, as well as growing its acquired advanced battery business, Williams Advanced Engineering.

Fortescue share price snapshot

Over the last month, Fortescue shares have risen by 15%.

The post Can shareholders have bigger dividends AND more spending on Fortescue Future Industries? 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 recommended Macquarie Group Limited. 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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