Fortescue Metals Group Ltd (ASX: FMG) shareholders have enjoyed impressive annual dividend payouts in recent years. Let's look at what sort of payment from the ASX iron ore giant we could expect in 2024.
A dividend yield is decided by two key factors. The first is the price/earnings (P/E) ratio that it's valued at, and the second is the dividend payout ratio. In other words – what multiple of earnings it's trading at and how much profit the business pays out.
Fortescue's large iron ore rivals — BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) — typically trade on a low P/E ratio.
The Fortescue board decided on a dividend payout ratio of 65% in the 2023 financial year annual result.
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How large could the Fortescue dividend be in 2024?
When a company commits to a dividend payout ratio, the performance of the net profit after tax (NPAT) plays a major part.
The iron ore price is notoriously volatile, but investors must estimate what they think the profit will be and then work from there.
According to Commsec, Fortescue is projected to generate earnings per share (EPS) of $2.32 in 2024 (FY24). This would mean it's trading on a forward P/E ratio of close to 9.
This annual profit generation could enable the miner to pay an annual dividend per share of $1.40 in 2024, according to the forecast. That would be a fully franked cash yield of 6.6% and a grossed-up dividend yield of 9.4%.
Is the ASX mining share a buy for passive income?
I don't think investors should buy a business just for the yield. In my opinion, the valuation has to make a lot of sense as well.
I really like the long-term future of Fortescue with its increasingly automated mining operations, green hydrogen initiatives and effort to become an important industrial battery player. That's why I'm a shareholder.
The business needs to balance its capital requirements for the green energy division with the short-term desire of Fortescue shareholders for dividend payments.
In the past, the iron ore price has moved in a cyclical way, and it may continue to be cyclical. If so, the best time to buy would be when the iron ore price is weak. At present, it is relatively strong at above US$110 per tonne, according to Trading Economics.
I would suggest that buying at around $19 or lower could leave more of a margin of safety.
