Is the Fortescue (ASX:FMG) share price an attractive opportunity?

Is the Fortescue Metals Group Limited (ASX:FMG) share price an attractive opportunity. The FY21 dividend yield is very high.

| More on:
asx investor daydreaming about US shares

Image source: Getty Images

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

Is the Fortescue Metals Group Limited (ASX: FMG) share price an attractive stock to own?

The broker Ord Minnett certainly thinks so. It has a price target on the iron ore miner of $29, which suggests potential upside of around 40% over the next 12 months.

Ord Minnett believes that the Chinese steel production will continue to remain strong for longer than expected. There's also the possibility that non-Chinese steel production could make up for any reduction of demand from China.

The broker feels that there's a good chance that the Fortescue share price could gain investor attention again as the iron ore price remains strong.

However, there are other brokers which don't have such a positive outlook for the Fortescue share price. Morgan Stanley has a price target of $17.45, which suggests a possible decline of the Fortescue share price of around 15%.

The broker thinks that the iron ore price could drop in the coming months if China's demand lessens over the rest of the 2021 year. More iron ore supply could also come online, such as Brazil, which has been impacted by COVID-19.

What about the dividend?

Fortescue is well known for its high dividend yield and FY21 is expected to be a really big dividend.

Different brokers have different expectations for the Fortescue dividend.

It might be unsurprising that Ord Minnett's positive outlook for the Fortescue share price also translates into big expectations for the dividend. Ord Minnett thinks Fortescue could pay a dividend of $3.52 per share for FY21, translating to a grossed-up dividend yield of 24.5%. In FY20, the broker is expecting the miner to pay a dividend of $3.10 per share – this is a grossed-up dividend yield of 22%.

Morgan Stanley is expecting Fortescue to pay a dividend of $2.89 per share in FY21 – that's a grossed-up dividend yield of 20%. In FY22, the broker is expecting a dividend of $1.56 per share, which is a grossed-up dividend yield of 10.9%.

Fortescue recently changed its capital allocation strategy, whilst retaining its commitment to shareholder returns. It's targeting the top end of its dividend policy to payout 50% to 80% of full year net profit after tax (NPAT). With 20% of net profit available to fund future growth, Fortescue intends to allocate 10% to fund renewable energy growth through Fortescue Future Industries (FFI) and 10% to fund other resource growth opportunities.

What's Fortescue Future Industries?

FFI has been created to identify renewable energy and green hydrogen projects both in Australia and globally.

The business intends to "bring its demonstrated capability of adopting innovation and technology to ensure future green energy projects will position Fortescue at the forefront of this emerging industry."

Fortescue also described the renewable energy and green hydrogen projects as diversification opportunities for the business.

Fortescue hopes that its green energy division can become a substantial size of the business over time.

Motley Fool contributor Tristan Harrison owns shares of Fortescue Metals Group Limited. 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 Bruce Jackson.

More on Resources Shares

Miner and company person analysing results of a mining company.
Resources Shares

The Rio Tinto share price hit a 52-week low last week, is it a buy?

Is this mining giant worth digging into?

Read more »

A man wearing a hard hat and high visibility vest looks out over a vast plain where heavy mining equipment can be seen in the background.
Resources Shares

Is the Fortescue share price a buy for passive income?

Let’s dig into the potential of this mining giant.

Read more »

Female miner standing next to a haul truck in a large mining operation.
Resources Shares

Major miners fall as iron ore prices continue to sink

Waning Chinese demand and oversupply concerns push iron ore prices lower.   

Read more »

A mining worker clenches his fists celebrating success at sunset in the mine.
Resources Shares

Would I buy Pilbara Minerals shares?

Are investors missing an opportunity with this lithium stock?

Read more »

Three miners looking at a tablet.
Resources Shares

Here's the earnings forecast out to 2029 for BHP shares

Let’s dig into the predictions.

Read more »

A smiling miner wearing a high vis vest and yellow hardhat does the thumbs up in front of an open pit copper mine.
Broker Notes

Why Macquarie expects this ASX All Ords copper stock to soar 48% in a year

Macquarie forecasts another big year of gains ahead for this ASX All Ords copper stock. But why?

Read more »

Female miner standing smiling in a mine.
Broker Notes

Why Macquarie predicts Pilbara Minerals shares could surge 71%

Macquarie forecasts a big rebound ahead for Pilbara Minerals shares. Let’s find out why.

Read more »

Two mining workers in orange high vis vests walk and talk at a mining site.
Resources Shares

ASX All Ords mining stock sinks on US silver acquisitions

Investors are bidding down the ASX All Ords miner on US acquisition news. But why?

Read more »