The current Fortescue Metals Group Limited (ASX: FMG) share price may offer a grossed-up dividend yield of almost 22%. Is the Fortescue share price a buy right now?
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Is the dividend really going to be that big?
The brokers at Macquarie Group Ltd (ASX: MQG) think that Fortescue is going to pay a fully franked dividend of $3.45 per share in FY21.
If that turns out to be correct, then that's a 21.7% grossed-up dividend yield at the current Fortescue share price.
The Fortescue earnings per share (EPS) is projected to be $4.30. That puts the current valuation at 5x FY21's estimated earnings.
But Macquarie is then expecting a sizeable drop of profit with iron ore prices expected to decline. In FY22, Macquarie is expecting Fortescue's EPS to be $3.03. That would be a profit decline of around 30%.
The broker also thinks that the Fortescue dividend will see a 29% cut in FY22 to $2.45. That translates to a forward grossed-up dividend yield of 15.4%.
Overall, Macquarie rates Fortescue as a buy with a price target of $27 for the next 12 months.
The most recent ASX announcement from the company is regarding the Grand Inga Hydroelectronic Projects. The Democratic Republic of Congo Government has invited interested corporations and governments to contact Fortescue Future Industries (FFI) – Fortescue's green projects division – if they have investment or service interest in the Inga Projections on the condition that personnel will be trained and sourced from the DRC as Fortescue has done in Australia.
In that announcement, the company confirmed that discussions have taken place with the DRC Government in respect to the grant of exclusive rights to develop the Grand Inga suite of projects, though no formal binding agreement has been concluded yet.
Are there bearish opinions on the Fortescue share price?
Morgans thinks that the Fortescue share price is a sell, with a price target of $18.80.
That rating is despite Morgans projecting the business is going to generate more EPS in FY21 and FY22 and pay higher dividends, compared to what Maquarie thinks.
The dividend projection for FY21 from Morgans is $3.67 per share, translating to a whopping 23.1% grossed-up dividend yield this year.
Morgans has some conservative thoughts on the miner because of the very strong iron ore price which it doesn't think is going to stay around forever. The broker thinks that compared to BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), Fortescue is more vulnerable to falling iron ore prices. The brokers thinks that global steel demand is close to its highest point.
Using Morgans' projections for FY22, Fortescue is valued at approximately 7x estimated earnings. The forecast grossed-up dividend yield for the next financial year (FY22) is 15.7%.
