Key takeaways:

• Iron ore major FMG is one of the highest-yielding dividend stocks on the ASX

• The company has delivered shareholders returns of nearly 400% over the last five years

• Despite most analysts holding a sell' recommendation amid expectations earnings will decrease next year, FMG is trading close to an all-time high

Note: All figures in the following report have been sourced from Refinitiv, based on data available at April 16, 2023. For more information, sign up to Selfwealth Premium and gain access to hundreds of detailed stock reports on ASX and US-listed companies.One of the most successful stories of the ASX, Fortescue Metals Group (ASX: FMG) is an example of how a company can grow from a micro-cap and one that was on the verge of folding many years ago into a large-cap household name. 

FMG is Australia third largest iron ore player, an industry titan that started from humble origins. Today valued at $69.1 billion, the company is engaged in developing mining assets and associated infrastructure, as well as the exploration, production, processing, and sale of iron ore. 

Fortescue owns and operates a fully integrated infrastructure and supply chain, with a host of projects underway, none bigger than the Eliwana Mine and Rail Project and the Iron Bridge Magnetite Project, which are expected to boost the miner production output.

Fortescue Metals Performance and Returns

With a cumulative return of 394% over the last five years, FMG has decisively outperformed the benchmark index, with the ASX 200 up just 25.7%, excluding dividends.

Over the last 12 months, the stock has returned 3.8%, and more recently, the 1-month and 3-month returns are 4.6% and -1.6% respectively. 

The stock is showing strong signs of price momentum, with FMG shares recently trading 2.6% above their 50-day moving average of $21.86, and 14.5% above their 200-day moving average of $19.60. 

Furthermore, as at April 14, 2023, FMG was trading 3.8% below its 52-week high of $22.43 per share, and 54.7% above its 52-week low of $14.50.

Fortescue Metals Key Investor Metrics

For the year ending December, 2022, Fortescue revenue was down 12.6% to US$17.4 billion.

During the same period, its gross margins were 53.4%, continuing a theme where the company margins have been higher than its industry group average for each of the past five years.

Management has been able to generate a high return on investment using shareholders funds, as demonstrated by a return on equity level of 35.4%.

On a valuation basis, FMG is trading on a trailing price-to-earnings ratio of 7.5, and a forward price-to-earnings ratio of 8.9. The former represents a 14% discount compared with a five-year average of 8.7, and the latter represents a premium of 21% versus the five-year average of 7.4. Nonetheless, based on both P/E metrics, the stock is trading at a discount to the S&P/ASX 200 index.

In addition, the price-to-sales ratio for FMG is 2.7, which is a premium of 11% versus the five-year average of 2.4.

Fortescue Metals Share Opportunities and Outlook

With operations focused on exporting iron ore, particularly to China, the miner is inherently leveraged to growth in the world second largest economy. Historically, when China economy has grown strongly, especially its property sector, there has been strong demand for iron ore, a key steel-making ingredient. This underpins exports for the company.

At the same time, FMG development in new projects, to bring on additional iron ore production capacity, and future plans surrounding green' initiatives are intended to boost the company sales.

Over the last six years, the company has delivered six earnings surprises, including two positive surprises where earnings were more than 2% above the market forecast, one negative surprise where earnings were more than 2% below the market forecast, and three in-line surprises, being within 2% of expectations.

Across the last four weeks there have been nine revisions among analysts to FMG expected earnings. Eight of these changes were an upwards revision to earnings, with an average adjustment of 47.1%. With that said, there was also one downward revision.

Earnings estimates for FMG current fiscal year have increased over the past 90 days from US$1.50 per share to US$1.68 per share, with the 12% gain exceeding the industry average of -4%. Despite this improvement, analysts still expect the company earnings to decline in 2024, with the mean EPS estimate decreasing to US$1.33.

Having delivered US$22.3 billion in revenue in 2021, and US$17.4 billion in 2022, analysts expect the miner revenue to continue decreasing, with a mean forecast of US$16.4 billion for 2023, and US$14.9 billion for 2024.

Fortescue Metals Key Risks

Fortescue earnings are intrinsically linked to the price of iron ore. 

While higher iron ore prices are beneficial for the company, the opposite holds true as well. If iron prices decline, FMG earnings are directly impacted. Previously, the iron ore market has demonstrated cyclical behaviour, with boom' and bust' periods bringing in significant price differentials.

Another risk to the company relates to cost overruns and blowouts at its development projects, particularly during an inflationary environment.

In terms of price behaviour, FMG shares tend to outperform the S&P/ASX 200 index on days when the market is up, but they generally decrease by more than the index on days when the market falls.

Fortescue Metals Share Dividends

In recent years, Fortescue Metals has established itself as one of the higher-paying ASX dividend stocks. However, it wasn't always the case. 

Higher dividends have been funded by surging iron ore prices and increasing iron ore shipments bringing in extra cash flow, at the same time debt was reduced.

Most recently, however, FMG fiscal year total dividend of $1.96 per share, based on a 73% payout ratio, was 34% lower than a year ago.

Of the more than 700 stocks that make up the Metals and Mining; industry group, FMG is one of just 45 companies that pay a dividend. Based on the two most recent dividends paid to shareholders, the stock current dividend yield is 8.7%.

Fortescue Metals Dividend History

Period

 Dividend (AUD) 

 Franking 

Interim HY23

$0.75

100%

Final FY22

$1.21

100%

Interim HY22

$0.86

100%

Final FY21

$2.11

100%

Interim HY21

$1.47

100%

Final FY20

$1.00

100%

Interim HY20

$0.76

100%

Final FY19

$0.24

100%

Special Dividend

$0.60

100%

Interim HY19 + Special

$0.30

100%

Final HY18

$0.12

100%

Interim HY18

$0.11

100%

Final FY17

$0.25

100%

Interim HY17

$0.20

100%

Final FY16

$0.12

100%

Interim HY16

$0.03

100%

Fortescue Metals Analyst Ratings 

Based on an aggregate of 17 analysts offering coverage of FMG, the stock has a mean sell' rating. 

This includes ten analysts with a sell' rating, two analysts with a strong sell' rating, and five analysts with a hold' recommendation. Two broker downgrades have occurred in the last 120 days.

In terms of price targets, the mean figure across 18 analysts is US$11.80, with a low and high range of US$8.79 and US$15.40 respectively. The mean target is -21.7% below the stock recent trading price.