Is the Fortescue Metals Group Limited (ASX:FMG) share price a buy for its fully franked dividend?

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Iron ore

After hitting $7 in February 2017, the Fortescue Metals Group Limited (ASX:FMG) share price has fallen 33 per cent to trade today at around $4.70.

The broking community seems somewhat dividend about Fortescue’s prospects.

In March, Citi analysts downgraded Fortescue to a sell rating from buy and cut its share price target all the way down from $5.40 to just $4.10. The downgrade came about because the broker said Fortescue had to discount its low-grade iron ore further to shift it.

In May, analysts at Credit Suisse retained their outperform rating and $5.75 share price target after Fortescue approved the development of the Eliwana project in Western Australia.

Earlier this month, a note out of UBS revealed its analysts retained their buy rating and $5.75 share price target on the iron ore producer’s shares following its strategic investment in Atlas Iron Limited (ASX:AGO).

FMG’s attractive dividend

On a trailing basis, Fortescue Metals shares trade on a fully franked dividend yield of almost 7.7 per cent, or almost 11 per cent when grossed up for franking credits.

The Fortescue dividend has been lumpy, given the company’s dividend policy of paying 50 to 80 per cent of net profit after tax.

A case in point is Fortescue’s most recent interim dividend of 11 cents per share, which was 45 per cent lower than the 2017 interim dividend.

Source: ASX

According to Commsec, consensus estimates are for the full year Fortescue dividend to be 26.7 cents per share.

Based on a share price of $4.70, Fortescue Metals shares trade on a forecast fully franked dividend yield of 5.7 per cent, or 8.1 per cent grossed up.

That’s attractive, especially if the current upswing in the mining cycle has “several more years to run,” according to a recent report out of PwC.

By comparison, BHP Billiton Limited (ASX:BHP) shares trade on a forecast fully franked dividend yield of 4.7 per cent. The Capital Club recently named BHP as one of the 6 best ASX dividend shares for 2018 and beyond.

Rio Tinto Limited (ASX:RIO) shares trade on a forecast fully franked dividend yield of around 5.2 per cent. 

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au