The Fortescue Metals Group Ltd (ASX: FMG) share price is heating up again after a ~20% tumble between late February and late March. The Fortescue share price is up 10% in the past month, defying expectations that iron ore prices might retreat from decade highs.
Bell Potter believes iron ore will continue to defy expectations and upgraded Fortescue on 23 April from hold to buy with a $23.85 target price. The broker believes the dividend upside outweighs the potential iron ore price downside.
Here's what the broker had to say about another potential Fortescue share price run.
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Iron ore continues to outperform
The research note said that the "iron ore price has continued to defy bearish forecasts (including ours) predicated on recovering supply from Brazil, restrictions being placed on certain sectors within the Chinese steel industry, potential slowing of stimulus spending on infrastructure and construction there and negative jawboning by the Chinese Industry Ministry."
The broker highlights a number of factors buoying iron ore prices including strong global steel demand and Chinese steel production, disappointing iron ore production out of Brazil and lower end of guidance ranges for Australian March quarter production.
The broker made a modest cut to FY21 product forecasts due to lower shipping volumes reported out of Port Hedland for the March 2021 quarter. Weighing in both opinions, Bell Potter upgraded its near-term iron ore price forecasts by 23%, 43% and 11% for FY21, FY22 and FY23 respectively.
Buy the Fortescue share price for dividends
Bell Potter has described that in a yield-hungry environment, Fortescue's dividend has been "a tangible price support in the face of the downside risks to the iron ore price".
With an improved near-term for iron ore prices, the broker believes a prospective 12-month dividend payout of A$4.01 including a final FY21 payment of A$2.41 is likely. This could represent an eye-watering yield of 18.5%.
