Today's Age
Big profits may see Fortescue boost dividends within a year
PETER KER
Fortescue Metals Group could be ready to double its dividend payout ratio within a year, meaning it could join BHP Billiton and Rio Tinto in significantly lifting shareholder returns in the 2015 financial year.
Fortescue's conditional desire to raise its dividend payout ratio to about 35 per cent should dramatically increase the fortune of its biggest shareholder Andrew Forrest, who was assured of a $103 million pay day on the back of the 10¢ dividend the company announced on Wednesday. The interim dividend, almost double analysts' expectations, came as Fortescue reported a net profit of $US1.71 billion ($1.89 billion) for the first half of fiscal 2014.
The profit, 259 per cent higher than in the first half of 2013, reflects the huge rise in iron ore production at the company.
Fortescue has also benefited from higher-than-expected iron ore prices in the past six months, and declining capital spending as its three-year expansion nears completion. The miner has famously used debt to fund its $US10.75 billion expansion, but early repayments over the half cut debt from $US10.5 billion to $US8.6 billion on Wednesday.
Fortescue chief financial officer Stephen Pearce said it was a ''reasonable expectation'' that Fortescue would repay $US2 billion more in 2014, to its target gearing level of about 40 per cent by the end of the calendar year. Fortescue has said it would seek to raise its dividend payout ratio from 18 per cent to 30-40 per cent once the gearing target is achieved, making possible a big rise in dividends in 2015.
''That's very likely to be the case … I expect they are going to get there by the end of the calendar year, and after that point they will probably step up the dividend payout ratio to about 35 per cent,'' said Credit Suisse analyst Matthew Hope.
Such a dividend boost is likely to coincide with BHP and Rio's expected round of share buybacks or special dividends but, Mr Pearce said, it all depended on iron ore prices continuing to average $US110-$US120 a tonne. ''If the iron ore price holds up our profits will be strong and our equity base improves significantly, together with the debt reductions would start to move us very close to those target levels,'' he said.
Platypus Asset Management is a top-10 shareholder in Fortescue, and chief investment officer Don Williams said the dividends were not his prime focus. ''We don't invest in mining stocks for dividends. It's nice to have them, but it's not the main reason we invest,'' he said.
Platypus expects the iron ore price to average higher than $US100 a tonne for at least a year or two, and Mr Williams said the scenario would bode well for Fortescue.
''As long as the iron ore price continues to exceed analyst expectations, the Fortescue debt load will come down faster than a lot of people are predicting,'' he said.
Fortescue shares touched their highest price in 22 months on Tuesday at $5.98, but the stock fell 14¢ after the results were announced to close at $5.84.
Some analysts believed Fortescue's profit numbers were lower than expectations, but it was in line with the expectations of both Mr Williams and Mr Hope.
''It was a good dividend, but whether this is the time to be paying dividends or focusing on paying down the debt is the question,'' said Mr Hope.
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