Will Fortescue (ASX:FMG) shares really pay an 18% dividend yield in FY21?

TristanHarrison 19 February 2021

At the current share price, Fortescue Metals Group Limited (ASX:FMG) is projected by some analysts to pay a grossed-up dividend yield of 18% in FY21.

The large iron mining business just reportedits FY21 half-year result which included a dividend of $1.47 per share. Thatdividend alone amounts to a grossed-up yield of 8.4% from Fortescue. But thereare analysts out there that think there could be another big dividend with theannual report in six months.

But before we get to that, let’s look at whatFortescue just reported.

Fortescue’shalf-year result

In the six months to 31 December 2020,Fortescue sold 90.2 Mt of iron ore, which was 3% higher than the priorcorresponding period. The realised price of that ore jumped 42% to US$114 perdry metric tonne (dmt).

The higher iron ore price and increasedvolume sold led to Fortescue’s revenue rising by 44% to US$9.3 billion.

With the benefit of higher prices and acontinued focus on cost management through productivity and innovation,Fortescue was able to increase its underlying earningsbefore interest, tax, depreciation and amortisation (EBITDA) margin by six percentage points to 71%. This helped underlying EBTIDA rise by 57% to US$6.6 billion.

Net profit after tax (NPAT) rose by 66% toUS$4.08 billion. Looking at earnings per share (EPS) in Australian dollarterms, it rose by 58% to $1.84.

Operating cashflow grew by 42% to US$4.4billion and free cashflow rose 12% to US$2.5 billion.

Fortescue’s net debt is down to just US$110million, down from US$258 million at 30 June 2020. The gross debt still standsat US$4.1 billion and the cash balance is US$4 billion.

Whilst the $1.47 dividend per share declaredby the board represented a payout ratio of 80% of net profit, it also said whatit’s going to do with the other 20%.

It has established Fortescue FutureIndustries (FFI) to identify projects in the renewable energy and greenhydrogen sectors. Projects have been identified in both Australia and globally.

Fortescue said it’s going to leverage itssuccessful track record of identifying, assessing, and developing large-scaleresource and infrastructure opportunities. The company said it will bring itsdemonstrated capability of adopting innovation and technology to ensure futuregreen energy projects will position Fortescue at the forefront of this emergingindustry.

The company will allocate 10% of its netprofit to fund renewable energy growth with FFI. The other 10% will fund otherresource growth opportunities.

Isthat huge dividend yield possible?

It depends which projections you look at.Commsec has estimated that Fortescue can generate EPS of $3.61 per share inFY21, and that it will pay an annual dividend per share of $3.10. That wouldequate to the grossed-up dividend yield of almost 18%.

Broker Morgans has previously estimated thatFortescue could pay an even bigger dividend, of around $3.31 per share, withEPS of $4.14 for FY21.

But broker Macquarie Group Ltd (ASX: MQG) doesn’t think that the Fortescuedividend will be as big as the above estimates, with a projected FY21 dividendper share of $2.04. That’d be a grossed-up dividend yield of 11.7%, which isstill materially above 10%.