Fortescue investors should focus on quality result, not dividend plunge

Given that most of the key data in Fortescue’s (ASX: FMG) FY25 results were pre-released, it was unlikely that there was ever going to be any major surprises today. But, for one of Livewire readers’ favourite stocks, one item was always going to be the first stop on the results agenda: FMG’s dividend. How much? Am I still getting a great yield?

To save you the trouble in poring over the results, the answer is: $0.60 fully franked for the second half, totalling $1.10 for the full financial year. That’s down an eye-watering 44% on FY24’s total of $1.97 fully franked, but it’s still a commendable 5.6% fully franked yield based upon the price at the time of writing of $19.44

(But this kind of assumes that if you buy today, then FY26’s dividend doesn’t change. Think of it this way, if you took the leap of faith on July 1 last year when FMG opened at $21.49 then FY25’s yield was more like 5.1%, or to work it out for the price you bought in at, simply divide the dividend into your purchase price).

Today I had the pleasure of interviewing a veteran fund manager who very closely follows Fortescue and who had one clear message for investors from today’s results: Focus on the quality of the result, not the dividend yield. The good news for FMG investors is that Nick Pashias, Head of Equities at Antares Equities, believes that the company has indeed delivered a quality result.

Let’s check out the key data from today’s Fortescue results release, as well as what Nick had to say about the company – should you buy, hold, or sell?

Fortescue FY25 Results Overview

(All data in $US except for dividend in $A)

Key financial data:

• Revenue: $15.541 billion (vs Consensus $15.434 billion)
• EBITDA: $7.941 billion (vs Consensus $7.801 billion)
• NPAT: $3.366 billion (vs Consensus $3.545 billion)
• Free Cashflow: $2.568 billion (vs Consensus $2.615 billion)
• Net Debt: $1.111 billion (vs Consensus $1.323 billion)
• Earnings per share: $1.10 (vs Consensus $1.13)
• Final Dividend: $0.60 (vs Consensus $0.60)
• Payout ratio: 65% (vs Consensus 65%)

FY26 Guidance (reaffirmed):

• Iron ore shipments: 195 - 205Mt
• C1 cost for Hematite: $17.50 - 18.50/wmt
• Metals capital expenditure: $3.3 - 4.0B
• Energy capital expenditure: ~$300M and net operating expenditure of ~$400M

What was the key takeaway from FMG's result in one sentence?

Pashias: It was a good result, record production, tight cost control, and the dividend was in line. So it ticked all the right boxes for me.

Were there any surprises in this result that you think investors need to be aware of?

Pashias: There weren’t any major surprises in the numbers that I could see. A lot of it was already pre-released. EBITDA was slightly better, but that's at the margin.

For me, the standout was costs. Fortescue have really cemented themselves as the lowest cost producer in Australia. That's clear now – they’re now three to four dollars below Rio Tinto (ASX: RIO) and about a dollar lower than BHP Group (ASX: BHP). This is possible because they’re a smaller, more entrepreneurial sort of company, and I think that ability to move faster has helped them.

Would you buy, hold or sell FMG off the back of this result?

RATING: HOLD

Pashias: I think as a whole, Fortescue’s valuation is fair at these levels. But there might be some hidden value around its decarbonization assets. They're yet to show themselves in the earnings, if you like, but there's certainly a lot that they are doing. But again, it was a strong operating result today, and the dividend is strong.

Are there any risks investors need to be aware of?

Pashias: Sure, there definitely are. The big one is the volatility of the iron ore price, and that's a big driver of earnings, but the company continues to execute well in terms of its production and particularly in terms of its costs. So, I think it's fine.

The iron ore price has held up a lot better than people had thought. It's still trading around US$103/t which is a great price for Fortescue. The market consensus is below 100. Yes, we’re seeing lower steel production in China, but pig iron demand, which also uses iron ore, is not down as much. It's only down 1%. So, that’s good for the iron ore price.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

RATING: 3.5

Pashias: This has been an interesting reporting season. Some of the results look okay. Some of the discretionary retailers have probably done better, which shows that consumers are hanging in there. Some of the tech companies continue to show pricing power, but we've seen pockets of weakness in some of the cyclicals like Reece (ASX: REH), James Hardie Industries (ASX: JHX), BlueScope Steel (ASX: BSL) and Sims (ASX: SGM). So, it was a mixed bag as always, but generally stronger, which hopefully underpins the broad market valuation.