The Fortescue Metals Group Ltd (ASX: FMG) share price has performed excellently for shareholders over the past year, as we can see on the chart below, which doesn't even include all of the monster dividends that it has paid.
In the short-term, investor confidence about the ASX mining share seems to be highly linked to the iron ore price performance. I'd much prefer to buy Fortescue shares at under $18 or even under $16, but that's not what price the market is currently offering.
I think there are multiple reasons why today's price means it's still undervalued.
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Low forward earnings valuation
One of the easiest ways to compare businesses is the price/earnings P/E) ratio. It tells us what multiple of profit the company is valued at.
Some sectors typically trade on a high p/e ratio, such as technology. Whereas miners like Fortescue trade on a low P/E ratio. But, a dollar of profit is a dollar of profit whether it's made by a tech business or a miner.
According to profit estimates on Commsec, the Fortescue share price is valued at under 11 times FY24's estimated earnings. That projection includes a large decline in net profit after tax (NPAT) in the next financial year as iron ore prices have declined during FY23.
I think it'd be an even better time to buy when the iron ore price is around US$90 due to the cyclical nature of iron demand. However, the current price still represents good profit generation for the miner.
Strong dividend payments
There are plenty of projections out there about what's going to happen to the iron ore price and dividend in the next few years.
It's likely the dividend will be reduced in FY24 (compared to FY23) and possibly reduced even further in FY25. However, I don't think analysts collectively forecast that iron ore prices would surge in 2021, 2022 or 2023. Who knows what could happen in FY24?
My point here is that not only could dividends in the short-term be very satisfactory, but the longer-term dividends could be better than expected as well.
In FY24, the ASX mining share is predicted to pay an annual dividend per share of $1.29 according to Commsec. This translates into a forward grossed-up dividend yield of 8.6%. That passive income payment alone could be stronger than the overall market return over FY24.
Green energy
I don't think the company's green energy potential is being valued properly by the market.
With its Fortescue Future Industries (FFI) division, it aims to make electrolysers, high-performance batteries, green hydrogen and green ammonia, among other green energy efforts.
If it's even half as successful as its ambitions, this could be a sizeable profit generator for the company, and be a good support for the Fortescue share price.
By 2030, it could be producing 15mt of green hydrogen, which is hydrogen created from water with a process powered by renewable energy.
FFI aims to make green hydrogen the zero-emission fuel source for boats, planes and heavy equipment. Green hydrogen could also replace natural gas in pipelines.
There is also the potential for the mining division to explore, and mine, the minerals needed for FFI's operations, which would be good synergies between the two divisions.
