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Fortescue Metals Group Limited (ASX: FMG) Stocks are an important part of my portfolio. Earlier I described why I decided to buy the company’s stock and how long I plan to hold it.
Currently, I am receiving a large dividend from the S&P/ASX 200 Index (ASX: XJO) mining stake. This is because Fortescue is generating significant net profit after tax (NPAT) and cash flow, allowing it to pay a hefty dividend to shareholders and continue to invest in its green division, Fortescue Future Industries (FFI).
In the long term, I expect Fortescue to be able to generate considerable profits from the production and sale of products such as green hydrogen, green ammonia, green iron, and advanced batteries.
However, there are some situations where I could see myself selling my Fortescue shares, or at least thinking about it.
cleavage
In the news recently, Fortescue president Andrew Forrest revealed that Fortescue Future Industries may already be worth US$20 billion. This is “if the requests from investment banks for an initial public offering (IPO) of the division were any guide to its valuation,” according to the report. Australian Financial Review.
Shareholders would likely derive significant value from a Fortescue spin-off because it would mean investors could properly value FFI and the company’s mining segments separately. I would not be surprised if some investors who only wanted the mining segment were not enthusiastic about getting FFI as part of the deal, so the combined value of the two businesses could increase in a spin-off.
However, if I were to keep Fortescue shares and FFI shares, I would most likely sell shares of the mining business.
There would also be a major question about how Fortescue Future Industries would finance its green efforts. At the moment, you get 10% of Fortescue’s NPAT each year, plus access to the hefty balance.
I think it’s best that Fortescue remains a combined business for the long term.
stopped paying dividends
Dividends aren’t everything in investing, but I like investment income because of the extra cash flow it provides to my bank account for whatever purpose I choose, including reinvesting in other opportunities.
Each of my holdings pays dividends, although I am looking for total returns on my portfolio, not just dividends.
If Fortescue were to stop paying dividends, it would have to assess how long dividends would be suspended and why. Would he have stopped because his financial position is in jeopardy and he is overloaded with debt? Or is he pouring every available dollar into the green FFI opportunity, which could pay off in the long run?
It wouldn’t be a definite thing to sell in this situation, but I would certainly think about it.
China stops buying Australian iron ore
To me, this is the biggest risk facing Australian miners. If China stopped buying Australian iron ore, it would force me to reevaluate my holding of Fortescue shares.
China reportedly buys a vast majority of world iron ore production each year. What would happen if China stopped buying Australian iron? We have seen how he was willing to impose tariffs on other Australian exports, such as wine.
China has continued to buy Australian iron ore. It has been reliable during the COVID-19 pandemic, it is geographically closer to China than Brazil and there is not really a replacement option (at this stage).
However, China is reportedly working on a plan to reduce its dependence on iron ore, according to the Australian Financial Review. African iron ore could also become a competing force. Fortescue itself is looking to start an African iron ore project that could mitigate some future problems for Fortescue.
Finally, what would happen if China decided invade taiwan? It is definitely not a certain event, and I hope it never happens, but it has crossed my mind what geopolitical and economic consequences this could mean for Fortescue’s largest client.
silly takeaway
I plan to hold my Fortescue stock for years, maybe decades, but I think it’s a good idea to assess a few situations before they happen where you might want to sell.
