The S&P/ASX 200 Index (ASX: XJO) has followed Wall Street’s lead and is on course to end the week in the red. At the time of writing, the benchmark index is down 0.8% to 7,094.3 points.

Four ASX shares that have not let that hold them back today are listed below. Here’s why they are rising:

AGL Energy Limited (ASX: AGL)

The AGL share price is up 1% to $8.23. Investors have been buying this energy company’s shares despite there being no news out of it. However, given the market selloff today, safe haven assets like utilities could be in demand with investors.

Retail Food Group Ltd (ASX: RFG)

The Retail Food Group share price is up 10% to 7.6 cents. This morning, this embattled quick service restaurant operator revealed that it has settled its ACCC proceeding. The Donut King, Gloria Jean’s, and Michel Patisserie’s operator has agreed to pay $8 million to settle.

Starpharma Holdings Limited (ASX: SPL)

The Starpharma share price is up 1% to 52 cents. This follows news that the drug developer has received a $7.1 million research and development (R&D) tax incentive refund under the Australian Federal Government’s R&D Tax Incentive scheme.

TPG Telecom Ltd (ASX: TPG)

The TPG share price is up 2% to $4.89. Investors have been buying this telco’s shares following the release of a bullish broker note out of Morgans this morning. According to the note, the broker has upgraded TPG’s shares to an add rating with a $5.50 price target. The broker said: “We think the bad news is now priced in and see value at current levels. We upgrade TPG to an Add recommendation (from Hold).” TPG’s shares are still down 17% year to date.

The post Why AGL, Retail Food Group, Starpharma, and TPG shares are rising today appeared first on The Motley Fool Australia.

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More reading

• Brokers name 3 ASX shares to buy for Christmas
• 5 things to watch on the ASX 200 on Friday
• Why BWX, Novonix, Symbio, and TPG shares are dropping today
• Telstra share price lower after ACCC blocks TPG deal
• Here are the top 10 ASX 200 shares today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Starpharma. The Motley Fool Australia has recommended Starpharma and Tpg Telecom. 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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In afternoon trade, the S&P/ASX 200 Index (ASX: XJO) is on course to end the week in the red. At the time of writing, the benchmark index is down 1.15% to 7,071 points.

Four ASX shares that are falling more than most today are listed below. Here’s why they are dropping:

BWX Ltd (ASX: BWX)

The BWX share price is down heavily for a fourth day in a row and nursing an 8% decline to a new record low of 17 cents. Investors have been selling the Sukin skincare manufacturer’s shares this week following the release of shocking business update. BWX now has a mountain of debt almost triple its market capitalisation and is on track to breach its debt covenants. A recapitalisation may be needed to save the company from going under at this rate.

Earlypay Ltd (ASX: EPY)

The Earlypay share price is down a whopping 39% to 19.5 cents. Investors have been selling this lender’s shares after the release of an update on its exposure to RevRoof. The roofing business has fallen into administration and owes Earlypay approximately $29 million. Management advised that uncertainty has arisen around how much will be recovered by Earlypay from Revroof. As a result, it has withdrawn its guidance for FY 2023.

Evolution Mining Ltd (ASX: EVN)

The Evolution share price is down 3% to $2.93. This follows a pullback in the gold price overnight amid interest rate hike concerns. It isn’t just Evolution that is dropping today. The S&P/ASX All Ordinaries Gold index is down 2.2% this afternoon.

Pointsbet Holdings Ltd (ASX: PBH)

The Pointsbet share price is down a sizeable 11.5% to $1.24. This is despite there being no news out of the sports betting company today. And while there is plenty of selling going on in the tech sector after a poor night on the NASDAQ index, PointsBet is being punished far more than most. Interestingly, the company’s market capitalisation is now lower than its cash balance at the end of the last quarter.

The post Why BWX, Earlypay, Evolution, and Pointsbet shares are dropping today appeared first on The Motley Fool Australia.

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More reading

• Why 29Metals, BWX, Readytech, and Synlait shares are dropping
• 5 things to watch on the ASX 200 on Thursday
• Could ASX 200 gold shares be ‘at another pivot point’?
• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended PointsBet. The Motley Fool Australia has recommended PointsBet. 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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The Estia Health Ltd (ASX: EHE) share price could offer investors a lot of potential returns according to the fund manager Wilson Asset Management. It suggested the ASX share could rise by more than 50%.

What is Estia Health? For readers that haven’t heard of it, it’s an aged care operator. At December 2022, it had 72 operational homes, with 6,596 places and over 7,500 employees. It has almost 2,000 places in each of NSW and Victoria, with Queensland and South Australia making up the rest.

The business says it wants to keep growing with a program of capital investment to “increase capacity, and continually improve asset quality.”

WAM’s optimistic view on the Estia Health share price

Two of WAM’s leading investors were recently featured in a video talking about a few different topics.

Portfolio manager Tobias Yao called out Estia shares as an opportunity.

He said that the company has a “competent board and management team now”.

Yao noted that the aged care sector has had a “very tough time” over the last few years after the aged care royal commission and also with COVID-19. But, he said that WAM believes “that’s now behind us”. Explaining the positive case for the ASX share, he said:

If you’re an efficient operator in the aged care space there are a lot of opportunities from an M & A (mergers and acquisitions) perspective to acquire good assets at very attractive prices and at the same time we’ve seen quite a few large takeovers of aged care operating groups and we believe Estia itself is the target of potential acquisitions.

So, we think the intrinsic value is over $3 and currently the risk/reward looks to be very attractive.

If the Estia Health share price were to rise to $3 after a takeover offer, that would represent a potential rise of around 50%.

Recent performance

Estia Health recently made its own acquisition – it bought four residential aged care homes from Premier Health Care Group for $62 million, excluding stamp duty and transaction costs, funded by debt.

In the first quarter of FY23, its ‘spot occupancy’ on its mature home portfolio of 6,163 places, excluding the Burton expansion, was 92.3% at 31 October 2022. Average occupancy for the quarter was 91.7% for the ASX share compared to 90.6% in the second half of FY22.

The impact of COVID-19 has “continued to decline” during the FY23 first quarter. Total estimated incremental costs associated with prevention and response were $8.9 million for the quarter, compared to $13.4 million in the prior quarter.

It’s expecting to see the industry benefit from higher occupancy as the impact of COVID-19 lessens and a reduction in new supply intersects with the ageing population. The number of people over 85 is projected to increase by 60% in the next decade.

Estia Health share price snapshot

Over the last month, the aged care company has dropped around 8%.

The post This ‘very attractive’ ASX share could be a takeover target with over 50% upside appeared first on The Motley Fool Australia.

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More reading

• Why BWX, Earlypay, Evolution, and Pointsbet shares are dropping today
• 2023 ready: Here are my non-negotiables for investing in ASX shares next year
• Brokers name 3 ASX shares to buy for Christmas
• Should I buy Allkem shares this Christmas?
• This well-known ASX share is down 35% this year. Time to buy?

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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Next year could be a curly one for ASX shares as the global economy navigates the possibility of a recession. That’s why I think it is critical to have a game plan for your portfolio heading into 2023.

Having set criteria for your investments can help prevent impulse purchases. At the same time, it clarifies your acceptable standard for portfolio entry. As the saying goes, “You can’t hit a target you cannot see, and you cannot see a target you do not have.”

The importance of an investment checklist — or non-negotiables as I like to call them — is even greater during challenging economic times. Without it, you might run the risk of adding a fragile company to your holdings.

My ‘must-have’ list for ASX shares in 2023

Firstly, these are the conditions I’m personally setting out for my investments in 2023. I strongly urge you to consider what is important to you and your portfolio to create your own ‘non-negotiables’.

Steady up on the debt hotshot

Debt can be a beautiful thing when used effectively by a company. However, with elevated interest rates, a challenging market to raise capital in, and a possibly rocky road ahead — a boatload of debt is not something you want an ASX share to be strapped with.

Normally a debt-to-equity ratio below 40% is considered healthy. For me, I’m setting a hard limit of 25% debt on the balance sheet for 2023. Ideally, the company would also be in a net cash position.

I believe financial hardiness will be an important trait to have next year.

Hitting pause on the unprofitable ASX shares

There are plenty of exciting businesses that are pre-earnings, screaming that they’ll be the next 100X investment. Yet, next year will require my investments to be profit generators.

I’m not against investing in loss-makers in general… in fact, eight out of my 27 holdings are unprofitable companies. But, it comes with added risk if the cash runs out and the company is unable to raise additional capital.

In my opinion, profitable ASX shares are offering the most attractive risk-to-reward potential now. After all, it is company earnings that drive the share price in the long run, as shown above.

Ok, but can you allocate capital like a boss?

Capital allocation will make or break a company — that I am sure of. In 2023, the most important non-negotiable is a proven track record of effective use of capital by management.

Next year’s potential economic landscape is what makes this a critical consideration. There will likely be opportunities for ASX-listed companies to acquire and grow. Executed well, this can add huge value to the company. Executed poorly, and we could look at another Slater and Gordon (value destruction from Quindell acquisition shown below).

Before investing in an ASX share, consider reviewing the company’s past return on capital (ROC). For me, the bar is set at a minimum of 15%. Although, above 20% will be preferred.

The post 2023 ready: Here are my non-negotiables for investing in ASX shares next year appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Friday
• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Thursday
• 3 reasons to buy Wesfarmers shares before 2023
• Forget gold! Start hunting fallen ASX 200 shares to buy for an earlier retirement

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. 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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It has been another busy week for Australia’s top brokers. This has led to the release of a large number of broker notes.

Three broker buy ratings that you might want to know more about are summarised below. Here’s why brokers think these ASX shares are in the buy zone:

Liontown Resources Ltd (ASX: LTR)

According to a note out of Macquarie, its analysts have retained their outperform rating and $3.40 price target on this lithium developer’s shares. This follows news that the company has signed a binding power purchase agreement with Zenith Energy. The broker believes this is a positive outcome for the company and remains positive on the outlook of the Kathleen Valley project. The Liontown share price is trading at $1.26 on Friday.

Mineral Resources Ltd (ASX: MIN)

A note out of Morgans reveals that its analysts have initiated coverage on this mining and mining services company’s shares with an add rating and $94.00 price target. The broker is a fan of Mineral Resources due to its transformation from being primarily leveraged to high-cost/shortlife iron ore operations to low-cost/long-life iron ore and lithium assets. The Mineral Resources share price is fetching $79.30 today.

TPG Telecom Ltd (ASX: TPG)

Analysts at Morgans have upgraded this telco’s shares to an add rating with a $5.50 price target. Morgans made the move on the belief that recent share price weakness has created a buying opportunity for investors. Although it was disappointed to see the Telstra Corporation Ltd (ASX: TLS) blocked by the ACCC, its analysts believe the bad news is now priced in. Furthermore, the broker highlights that the Optus hack this year is likely to be a positive for TPG. The TPG share price is trading at $4.83 on Friday.

The post Brokers name 3 ASX shares to buy for Christmas appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Friday
• 2 ASX dividend shares that could see big payout increases next year
• Mineral Resources is a ‘formidable player in the lithium market’: Broker tips major share price gains
• 5 things to watch on the ASX 200 on Thursday
• Here are the 3 most heavily traded ASX 200 shares on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Tpg Telecom. 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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If you’re on the lookout for last minute Christmas gift ideas for your investment portfolio, then Allkem Ltd (ASX: AKE) shares could be a top option.

Although, this lithium miner’s shares are up 24% over the last 12 months, as shown below, one leading broker believes they can keep rising.

Should you buy Allkem shares for Christmas?

According to a note out of Goldman Sachs this month, its analysts have initiated coverage on the lithium miner with a buy rating and $15.20 price target.

Based on where Allkem shares are currently trading, this implies potential upside of 32% for investors over the next 12 months.

Interestingly, Goldman Sachs is bullish on Allkem despite being extremely bearish on lithium prices.

As mentioned here recently, the broker is predicting the lithium carbonate price to go from an average of US$59,331 a tonne this year to US$11,000 a tonne in 2024.

So why is Allkem a buy?

Goldman expects Allkem’s production growth to help offset softer lithium prices and sees opportunities to add value through downstream activities.

Allkem has the best production outlook in our lithium coverage, growing equity LCE production >4x by FY27E, supporting earnings rebound to current record levels despite declining lithium prices, on the back of: (i) Olaroz Stage 2, (ii) Sal de Vida, (iii) James Bay, and (iv) the Naraha lithium hydroxide facility.

Allkem has the largest lithium metal contained resource base amongst our coverage though is trading at a discount to peers. Future opportunities in Olaroz/Cauchari Stage 3, enhanced brine recoveries at Olaroz, Potash production at SdV, Mt. Cattlin resource extension, and the possible downstream at James Bay provide upside risks to our forecasts.

The post Should I buy Allkem shares this Christmas? appeared first on The Motley Fool Australia.

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More reading

• While the ASX 200 struggled in 2022, investors doubled down on lithium shares. Here’s why
• Leading brokers name 3 ASX shares to buy today
• ASX lithium shares have just been crunched. Time to buy?
• Why are ASX 200 lithium shares sinking like stones on Thursday?
• Lithium and travel: Goldman Sachs names the ASX growth shares to buy now

Motley Fool contributor James Mickleboro has positions in Allkem. 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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The REA Group Limited (ASX: REA) share price has been hit hard during 2022. At the time of writing the ASX share is down by 35%.

It’s rare for a leading business to fall that much over 12 months. The higher interest rates (and inflation) seem to be really affecting some parts of the market.

REA Group is a business that operates property sites like realestate.com.au.

For REA Group, it’s a tricky situation. Not only do higher interest rates (theoretically) hurt the company’s valuation, but it’s also hurting house prices – the thing that people are advertising on the platform. Why do interest rates matter so much for ASX shares and property? Warren Buffett once explained:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.

What’s going on with the property market?

House prices are falling amid the significantly higher interest rate. According to Corelogic, Sydney house prices have fallen more than 10% from their peak, though were still 10.3% above the pre-COVID level, at the end of November 2022.

Melbourne prices are only 2.8% above where they were at the onset of COVID. Melbourne house prices could reach pre-COVID levels by March next year.

Corelogic said that most of the other capital cities and broad ‘rest-of-state regions’ are still showing dwelling values at least 25% above March 2020 levels.

REA Group earns most of its revenue thanks to two different factors – how much it can charge for property listings and how many listings there are.

Falling property prices may give the company less room to implement strong price increases.

Domain Holdings Australia Ltd (ASX: DHG) shares were recently crunched after it told the market that conditions are “deteriorating”. There was a 16% decline in listings in October and a 22% decline in November. The ASX share then said:

Inner city Sydney and Melbourne continue to experience particular weakness, with November listings down 38% and 32% respectively. December is experiencing an earlier than usual seasonal decline as agents and vendors defer listings into the 2023 calendar year. This trend contrasts with December 2021 when listings activity was unusually long, extending into late December. As a result, December month to date listings are down around 51% in Sydney and 37% in Melbourne.

Is the REA Group share price a buy?

It seems quite likely that REA Group is also seeing a sizeable drop in listings, which puts pressure on earnings.

However, it’s possible that there could be a bit of a rebound in listing volumes next year if the higher interest rates encourage some property owners to sell.

The REA Group share price was higher than the current level for most of FY21 and FY22.

But, the ASX share could go lower than today if investors become more bearish about its earnings.

According to Commsec, the REA Group share price is valued at 36 times FY23’s estimated earnings. But, it is priced at 31 times FY24’s estimated earnings.

I think the business has a very strong market position, with promising investments in property sites in India, south east Asia and the US. But, we should pay most attention to the main profit generator of the business, which is uncertain.

It’d be even better valued if the shares were closer to $100, so I’d be happy to be patient, but I think the company can do well over the long term.

The post This well-known ASX share is down 35% this year. Time to buy? appeared first on The Motley Fool Australia.

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More reading

• Why European Lithium, Evolution, MedAdvisor, and REA shares are charging higher
• 5 things to watch on the ASX 200 on Wednesday
• Goldman Sachs names 2 ASX 200 blue chip shares to buy
• Top brokers name 3 ASX shares to buy today
• 3 ASX 200 tech shares to buy now before the market wakes up: expert

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 REA Group. 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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The Syrah Resources Ltd (ASX: SYR) share price is on course to end the week in a positive fashion.

In morning trade, the graphite producer’s shares are up 1.5% to $2.31.

Why is the Syrah share price rising?

Investors have been bidding the Syrah share price higher today despite the market weakness thanks to the release of an update on the company’s deal with electric vehicle giant Tesla.

One year ago today, the company executed an offtake agreement with Tesla to supply natural graphite Active Anode Material (AAM) from its vertically integrated AAM production facility in Vidalia, USA.

At the time, the company advised that the offtake obligation was conditional on the parties agreeing the final specifications of AAM by no later than 31 December 2022.

The good news is that today’s announcement reveals that the agreement of final specifications of AAM has been fulfilled. Management notes that the final specifications are aligned with Syrah’s planned AAM product from Vidalia that informed the final investment decision on the expansion of Vidalia’s production capacity to 11.25ktpa AAM.

Though, the deal isn’t quite final just yet. The offtake obligation remains conditional on Syrah achieving final qualification of AAM by no later than 31 May 2025. The company also warned that the agreement may be terminated if production has not started by 31 May 2024.

However, the latter seems highly unlikely. Management notes that the start of production of the 11.25ktpa AAM Vidalia facility is targeted in the September 2023 quarter.

Tesla increases its offtake

Another positive that could be supporting the Syrah share price today is news that Telsa has exercised its option to offtake an additional 17ktpa AAM from Vidalia at a fixed price and for an initial term of no less than four years.

This is subject to the expansion of Vidalia’s production capacity to 45ktpa AAM.

Syrah will work towards finalising the detailed terms of this additional offtake obligation in an offtake agreement.

It is also working on a Definitive Feasibility Study (DFS) on the expansion of Vidalia’s production capacity to at least 45ktpa AAM, inclusive of 11.25ktpa AAM. Detailed engineering, procurement, and construction phases for the subsequent expansion of Vidalia will follow the DFS sequentially, subject to Syrah board approval and customer and financing commitments.

The post Syrah share price higher on Tesla update appeared first on The Motley Fool Australia.

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More reading

• These quality ASX dividend shares are buys: Goldman Sachs
• Bought $1,000 of Rio Tinto shares 10 years ago? Here’s how much dividend income you’ve received
• 2 reasons to buy BHP shares before 2023 (and 2 reasons to sell)
• Can Fortescue stock maintain its dividend in 2023?
• Buy Telstra and this ASX 200 dividend share: analysts

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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BHP Group Ltd (ASX: BHP) shares are among the most widely held on the ASX share market. It’s the biggest ASX share. But, at this current stage, is the resources giant an opportunity hiding in plain sight?

BHP currently has a market capitalisation of around $235 billion according to the ASX.

There has been a lot going on with the global share market this year, with higher interest rates and strong inflation. For the ASX share, it has been exposed to rapidly changing commodity prices.

As iron ore prices fell, coal prices went up, which helped cushion some of the earnings hit for the business.

Here are some of the things that I’m keeping in mind with BHP shares at the moment.

2 reasons to buy BHP shares right now

Big dividend

Historically, the ASX share market has returned an average of 10% per annum over the decades.

BHP’s expected dividend could make up a significant portion of the return from BHP shares over the next year or so.

According to Commsec, the ASX share could pay an annual dividend per share of $3.13 in 2023. This would result in a grossed-up dividend yield of 9.7% in FY23, or 6.8% excluding the franking credits.

I don’t know what the BHP share price is going to do in 2023, but the dividend could provide an attractive level of investment returns.

China reopening

China has been implementing a number of changes when it comes to its COVID rules. People now don’t need to present a negative COVID-19 test to enter a certain place or do an activity, such as taking public transport in some cities.

The Asian superpower also has plans to cut its quarantine requirements for overseas travellers in January, according to Bloomberg.

BHP can benefit if there is more economic activity in the country. It sells a number of commodities that China uses in large amounts, such as copper, as well as iron. The eventual acquisition of OZ Minerals Limited (ASX: OZL) could be a good boost for the company’s copper earnings.

2 reasons not to buy BHP shares

Best the resource prices are going to be?

When resource prices go up, it’s a great bump for the profitability of the business. Mining costs generally don’t change much from month to month. However, if the resource price jumps then this largely adds to net profit after tax (NPAT), aside from paying more to the government.

The iron ore price has been climbing in recent weeks, but perhaps this has been because investors are anticipating the Chinese reopening. How much stronger can investor excitement build if the market is already pricing in a reopening?

Coal prices may have already peaked as well, with prices somewhat calming down, though they are still elevated.

Unless there is a sustained stronger demand for iron from China, could we have seen the strongest that the resource prices are going to be in FY23?

Bloomberg has also reported that China’s streets are more deserted than during lockdowns. Reportedly, traffic in China’s biggest cities has dropped to the lowest since the Lunar New Year holiday. Will there be strong demand for steel/iron if the general population aren’t as active as they were before?

Elevated BHP share price

The BHP share price has gone on a strong run, rising by around 20% in two months.

With how cyclical resource prices are, I think paying a good price is important to give a margin of safety so that investors have a better chance of there not being capital losses on the investment.

The BHP share price is at almost the highest level it has been since it divested its petroleum business to Woodside Energy Group Ltd (ASX: WDS).

I don’t know what’s going to happen next. But, we don’t have to act today. A lot of being successful with investing is having patience – with both owning the investment and waiting until the company is at a better price.

In my opinion, the BHP share price is a bit too high to think it’s a buy. I’d wait for a price that’s at least below $40.

The post 2 reasons to buy BHP shares before 2023 (and 2 reasons to sell) appeared first on The Motley Fool Australia.

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More reading

• BHP shares ‘look expensive’: broker
• Could copper become ‘the lithium’ of 2023?
• Why is BHP’s dividend yield so high?
• Why did the iron ore price just hit a 6-month high?
• 3 ASX 200 dividend shares with payouts that jumped more than 10% this year

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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Fortescue Metals Group Limited (ASX: FMG) shares are one of the biggest dividend payers within the S&P/ASX 200 Index (ASX: XJO). But, a large dividend yield is one thing. How reliable is the dividend from Fortescue stock going to be next year?

Reliability, to me, means being able to at least maintain, or perhaps grow, the dividend compared to last year.

It’s a tough challenge for ASX iron ore shares to maintain their dividend.

Dividends are paid out of profits. Iron ore miner profits are heavily linked to the iron ore price. The iron ore price is linked to demand from China.

Can Fortescue stock keep paying good dividends?

In FY22 the business paid an annual dividend per share of $2.07 per share. This represented a dividend payout ratio of 75% of net profit after tax (NPAT).

Fortescue’s FY22 dividend was cut by 42% compared to the FY21 total dividend per share of $3.58 per share, which was 80% of NPAT.

The ASX iron ore miner’s dividend policy is to target the upper end of a payout range of between 50% to 80% of NPAT.

In FY23, Commsec numbers suggest that Fortescue is going to generate earnings per share (EPS) of $2.04. The dividend projection for FY23 on Commsec at the moment is $1.44. This would represent a dividend payout ratio of 70.6%. It would also mean that the grossed-up dividend yield is 9.9%.

But, it would represent a decline of around 30% compared to FY22.

Even if Fortescue paid a dividend that equates to a dividend payout ratio of 80% of the projected FY23 EPS, it would be an annual dividend per share of $1.632, which would represent a cut of 21%.

In other words, the earnings projections are suggesting that a Fortescue dividend cut seems likely.

Is there a chance that the prediction is wrong?

Investors weren’t expecting the iron ore price was going to go above US$200 in 2021, yet it did.

The iron ore price could perform better than investors are expecting, particularly if the reopening of China goes well. China is steadily lifting its COVID restrictions and slowly to a ‘COVID normal’ setting.

If economic activity and construction activity goes better than expected in China, then that could be a very useful tailwind for the earnings and dividend. However, I’m not sure how much further the iron ore price can climb in the short term. Time will tell how things go with the price.

FY24 dividend prediction

2023 is just one year, what does the following year have in store?

Commsec numbers suggest another dividend decrease. In FY24, Fortescue could pay an annual dividend per share of $1.14. This would translate into a grossed-up dividend yield of 7.8%.

Essentially, analysts are expecting that the Fortescue dividend is going to go downhill.

The post Can Fortescue stock maintain its dividend in 2023? appeared first on The Motley Fool Australia.

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More reading

• Why is the Fortescue dividend yield so high?
• 2 reasons I think the Fortescue share price can keep rising (and 2 why it can’t)
• Why did the iron ore price just hit a 6-month high?
• What’s going on with the Fortescue share price on Friday?
• Why is the Fortescue share price having another day to forget?

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. 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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