Here’s why the Fortescue Metals Group Limited (ASX:FMG) share price is under pressure on Monday and could have fallen into the buy zone.
The post Why the Fortescue (ASX:FMG) share price is sinking 5% today appeared first on The Motley Fool Australia. –
In afternoon trade, the iron ore producer’s shares are down 5% to $19.01.
This latest decline means the Fortescue share price is now down 28% from the record high it reached in January.
Why is the Fortescue share price tumbling lower today?
Investors have been selling Fortescue shares on Monday after another pullback in the iron ore price.
According to CommSec, the iron ore price fell by a further US$5.80 a tonne or 3.5% to US$160.20 a tonne on Friday night. This was reportedly driven by news that Chinese regulators will restrict output for some steel mills in Tangshan until the end of 2021.
As Tangshan is China’s largest steel-producing city, investors appear concerned that demand will soften meaningfully and weigh on the iron ore price.
Is this a buying opportunity?
One broker that sees a lot of value in the Fortescue share price is Macquarie.
This morning the broker retained its outperform rating and $25.50 price target on the mining giant’s shares.
Based on the current Fortescue share price, this price target implies potential upside of 34% over the next 12 months.
Macquarie’s recommendation follows Fortescue’s US$1.5 billion note offering last week. As well as repaying its 2022 Senior Unsecured Notes, the broker expects the funds to support its Iron Bridge plans. This will allow it to maintain a high dividend payout ratio.
What about dividends?
In light of the above, Macquarie is forecasting dividends of $2.88 per share and $1.92 per share over the next two financial years.
This will mean very generous dividend yields of 15.1% and 10.1%, respectively, in FY 2021 and FY 2022.
Based on the former and Macquarie’s price target, Fortescue’s shares could provide investors with a stunning total return of almost 50% over the next 12 months.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.