FMG share price falls sharply on Thursday as dividends come into focus

We examine the latest details behind Fortescue’s dividend reinvestment plan as well as briefly look at Morgan Stanley’s revised view of the iron ore market.

FMG share price turns lower, iron ore prices remain elevated

The Fortescue Metals Group (FMG) share price fell sharply on Thursday, 17 September – amid general market weakness and following the release of details surrounding the company’s latest dividend reinvestment plan (DRP).

At the time of writing FMG traded down 5.7%, to $16.335 per share, modestly off its 52-week high of $19.56 per share.

Bolstered by elevated iron ore prices which have pushed mining company's free cash flow and earnings to new highs – FMG’s attractiveness for income-focused investors has potentially increased in recent times – as the miner prioritises delivering above-market yields to shareholders.

Indeed, management, well aware of the importance of FMG’s dividend, said as part of the FY20 results release, that:

'Delivering enhanced returns to our shareholders remains a key priority and for FY20 we have declared US$3.7 billion in dividends [equivalent to AUD$1.76 per share], representing a payout ratio of 77 per cent of full year NPAT.’

Under the company’s current dividend policy, FMG aims to payout between 50-80% of full-year profits (NPAT) in the form of dividends.

FMG is set to pay its final (FY20) dividend on 2 October.

Dividend reinvestment plan in focus

Though Fortescue traded ex-dividend on 31 August, the specifics around the miner’s dividend reinvestment plan – specifically the DRP allocation price – remained unclear.

For investors who elected to participate in the DRP, FMG today revealed that the allocation price would be $17.836 per share.

'The allocation price has been calculated in accordance with the Plan rules as the average of the daily volume weight average market price of all Fortescue shares, trades on the Australian Securities Exchange during the period of ten trading days commencing on the second trading day after the Record Date,’ the company said in a statement to the ASX.

DRP shares are set be issued on 2 October.

Thoughts on the iron ore market

Analysts have progressively grown more bullish on the price outlook for iron ore in recent months – as the mainstay commodity continues to trade around multi-year highs.

Morgan Stanley analysts were some of the latest to revise their view on the commodity, saying:

‘A higher-for-longer iron ore price scenario is our new base case, driven by a slower unwinding of current tightness through 2021. However, some miners have run ahead of these expectations, implying high iron ore prices.’

FMG was one of those miners, with the investment bank’s analysts downgrading the miner to Under-weight (UW).

By comparison, BHP Group (BHP) is one of Morgan Stanley’s preferred miners, with the investment bank upgrading the stock to Overweight, based on both its upside potential and diversification.

What are your thoughts on FMG...

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