Is the Fortescue dividend at risk from the miner's $9b decarbonisation strategy?

How will Fortescue's decarbonisation plans impact its dividends…

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It has been a tough week so far for the Fortescue Metals Group Limited (ASX: FMG) share price.

Since announcing its decarbonisation strategy on Tuesday, the mining giant's shares have tumbled over 5% to $16.54.

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Why is the Fortescue share price falling?

Investors appear to have been selling down the Fortescue share price amid concerns that the company's dividends could be under threat.

While this may not be news to many readers, as I have previously warned about the impact the company's decarbonisation plans could have on its dividends, the market finally seems to be waking up to this threat now.

This is because Fortescue has announced that it intends to spend US$6.2 billion or A$9.2 billion to decarbonise its Pilbara operations.

While the company has not advised whether it will use its free cash flow or take on debt to fund these plans, the general consensus is that it will use the former and cut back its dividend payments.

This means the generous dividend yields that Fortescue's shares have been offering in recent years could be coming to an end.

What are analysts saying?

According to a note out of Goldman Sachs, its analysts continue to believe that Fortescue's dividend payout ratio will be impacted by this strategy. It commented:

Today's announcement and commitment underpins our view that FMG is at an inflection point on capital allocation, and to fund the ambitious decarb strategy, we assume the dividend payout ratio falls from the current 75% to 50% from FY24 onwards.

Goldman added:

The capital estimate of US$6.2bn represents the incremental spend over and above existing planned sustaining and mining fleet replacement capex and excludes Iron Bridge mining fleet replacement, implying the overall decarbonisation spend is above our previous US$7-8bn estimate (not in our numbers) which included the Pilbara Energy Connect (PEC) project. While FMG expect the investment to generate a positive NPV largely on the displacement of diesel costs, the target opex saving of ~US$0.8bn pa was below our prior estimate of ~US$1bn, but this will depend on oil and WA domestic gas price assumptions.

Fortescue dividend forecast

In light of the above, the broker is forecasting fully franked dividends per share of 81 US cents in FY 2023, 37 US cents in FY 2024, and then 31 US cents in FY 2025.

Based on the current Fortescue share price at exchange rates, this will mean yields of 7.3%, 3.3%, and 2.8%, respectively.

Goldman has a sell rating and $12.10 price target on the company's shares.

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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