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Is Fortescue’s dividend threatened by its $9 billion decarbonisation strategy?

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It’s been a tough week for Fortescue Metals Group Limited (ASX: FMG) share price.

Since announcing The mining giant’s shares fell more than 5% to $16.54 on Tuesday amid a decarbonisation strategy.

Why is Fortescue’s share price falling?

Investors appear to have driven down Fortescue’s share price amid concerns that the company’s dividend could be under threat.

While this may not be news to many readers, as I have previously warned about the impact the company’s decarbonisation plans could have on its dividend, the market seems to be finally waking up to this threat.

That’s because Fortescue has announced it intends to spend US$6.2 billion, or A$9.2 million, to decarbonise its Pilbara operations.

While the company has not advised whether it will use its free cash flow or take on debt to fund these plans, the general consensus is that it will use the former and cut its dividend payout.

This means that the generous dividend income that Fortescue shares have offered in recent years could come to an end.

What do analysts say?

According to the note from Goldman Sachs, its analysts continue to believe that this strategy will affect Fortescue’s dividend payout ratio. It commented:

Today’s announcement and commitment reinforces our view that FMG is at an inflection point in capital allocation, and to fund an ambitious decarbonisation strategy, we expect the dividend payout ratio to drop from the current 75% to 50% from FY24.

Goldman added:

The US$6.2 billion capital estimate represents additional costs over and above the existing planned capital expenditure to maintain and replace the mining fleet and excludes the replacement of the Iron Bridge mining fleet, which means that the total cost of decarbonisation exceeds our previous estimate by 7 -US$8 billion (not in our figures) which included the Pilbara Energy Connect (PEC) project. While FMG expects the investment to result in a positive NPV mainly due to shifting diesel costs, the target operating cost savings of ~US$0.8 billion per year was lower than our previous estimate of ~US$1 billion , but it will depend on the price of oil and domestic gas in Western America assumptions.

Fortescue Dividend Forecast

In light of the above, the broker forecasts fully franked dividends per share of US$81 cents in FY2023, US$37 cents in FY2024 and US$31 cents in FY2025.

Based on Fortescue’s current share price at exchange rates, this would mean yields of 7.3%, 3.3% and 2.8% respectively.

Goldman has a sell rating and a $12.10 target price on the company’s stock.

https://www.fool.com.au/2022/09/22/is-the-fortescue-dividend-at-risk-from-the-miners-9b-decarbonisation-strategy/

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