The Fortescue share price is a value investing dream today

The fall in ASX share prices makes Fortescue Metals Group Limited (ASX: FMG) an outstanding value investing opportunity with a high interim dividend yield right now.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The recent market downturn has filled most investors' portfolios with red arrows. Fortunately, it has also provided some outstanding value investing opportunities.

H1 earnings season has bought admissions from Qantas Airways Limited (ASX: QAN), Treasury Wine Estates Ltd (ASX: TWE) and Bluescope Steel Limited (ASX: BSL) (among others) surrounding the impact on full year earnings of the ongoing coronavirus outbreak. 

On the back of news like this the S&P/ASX 200 (INDEXASX: XJO) fell 1.6% on Tuesday. This was on top of a 2.5% fall on Monday. Many traders are also taking this opportunity to take profits, which was clearly displayed by the 2-day rise and fall of gold mining shares.

The value investing opportunity

When the market moves as one, it always uncovers great opportunities for value investing. Fortescue Metals Group Limited (ASX: FMG) is suddenly available at a price-to-earnings (P/E) ratio of 4.7 and a price-to-book ratio of 2.67. 

On a recent earnings call, Fortescue CEO Elizabeth Gaines stated "Our shipments are proceeding on schedule. We are confident in the strength of the Chinese economy."

Fortescue has been going strong all year. Partly this is due to ongoing issues facing Vale SA, the world's number one iron ore producer and exporter. A lot of credit also goes to its new high grade iron ore blend, which the company has been selling successfully into China.

The result has turned Fortescue into a cash compounding machine. Its recent H1 results showcased the company as a consistent low cost producer with quarter on quarter increases in revenue. It spent $852 million expanding production capacity. It also smashed expectations with $3.66 billion profit and has $2.5 billion free cash flow.

Fortescue announced a $0.76 interim dividend on 19 February. At Tuesday's closing share price of $10.93, this means an interim payment of 7.4%. There are also indications of a higher full year payment.   

This is what value investing is about. A well managed, cash gushing machine capable of generating greater revenues with every dollar of capital employed, and on sale at a reasonable price.

The company's return on capital expended (ROCE) for FY19 was a massive 65%. This is 65 cents of earnings before interest and taxes (EBIT) for every dollar of capital unencumbered by liabilities. In comparison, BHP Group Ltd (ASX: BHP) forecast approximately 20% ROCE by FY22.

Additionally, Fortescue's earnings yield for H1 stands at 11.9% compared with approximately 7% for BHP at the end of FY19.

Foolish takeaway

Fortescue Metals Group is a very well managed company. It has a history of outperforming in compound annual growth rates (CAGR) across all financial performance indicators. It is a low cost producer that is able to wring large returns from every cent of capital employed. 

Thanks to the market, it is also going cheap at a current earnings multiple of around 4.7. In my opinion, picking up Fortescue stock before the ex-dividend date of 2 March is a very good value investing opportunity, with the miner's shares providing a 9.15% dividend yield (at the time of writing), as well as the high likelihood of capital growth in the short to medium term. 

Motley Fool contributor Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Value Investing

Woman in celebratory fist move looking at phone
Value Investing

3 compelling ASX value stocks to consider this week

ASX value investors may wish to take a closer look.

Read more »

Happy couple doing online shopping.
Value Investing

Top value ASX shares I'd buy now while they're trading below fair value

These businesses have plenty of potential to deliver good returns, in my view.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Value Investing

2 ASX value shares for 2025

Both of these stocks seem too cheap to ignore.

Read more »

A woman wine tasting in a bottle shop.
Value Investing

ASX value shares rated as broker buys

The sell-off has opened the window for value plays to shine.

Read more »

A senior couple sets at a table looking at documents as a professional looking woman sits alongside them as if giving retirement and investing advice.
Value Investing

Forecast earnings growth of 10% a year but down 11%, is now the time for me to consider this ASX 200 high-flyer?

Despite recent good news, the shares are down...

Read more »

asx share price spark represented by smiling lady holding sparkler
Dividend Investing

9.6% yield! Is the second largest dividend on the ASX 200 one to consider snapping up today?

A dividend yield approaching 10% is bona fide catnip for income investors. But is there a catch?

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
Best Shares

Top oversold ASX shares to buy in February 2025

Hoping to bag an investment bargain this month?

Read more »

A person leans over to whisper a secret to a colleague during a meeting.
Value Investing

Warren Buffett sold over $134 billion worth of stock in 2024, but his most recent $200 million in purchases are sending a clear message to investors

Buffett is sending a warning to investors, but make sure you understand what his purchases are saying.

Read more »