Fortescue Metals Group Reduces Dividend Amidst Decline in Operating Cash Flow and High Investment

Fortescue Metals has reduced its dividend to pre-pandemic levels due to declining operating cash flow and increased investment in new technologies. The company expects capex to exceed $4bn next year, with around a quarter of it being discretionary. Despite this, analysts remain confident in Fortescue's ability to generate at least $3bn in cash profits annually. The company's valuation multiples suggest its share price is near its historical average.

Fortescue Metals Group (FMG), one of the world's largest iron ore producers, has announced a significant reduction in its dividend for the year ending June 2025. The company, controlled by Andrew and Nicola Forrest, will distribute A$1.24 billion in dividends for the year, down from the previous year's dividend of A$2.4 billion [1]. This reduction comes despite the company's robust operational performance, highlighting the strategic shift towards growth and decarbonization.

The company's net profit after tax (NPAT) for the fiscal year 2025 (FY25) declined by 41% to A$3.4 billion, primarily due to an 18% decrease in the average realized price for hematite to A$85 per dry metric tonne (dmt) [2]. Despite this, Fortescue maintained record iron ore shipments of 198.4 million tonnes, underscoring its cost efficiency and operational resilience. The company's underlying earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at A$7.9 billion, a 26% decrease from the previous year's A$10.7 billion, resulting in an underlying EBITDA margin of 51% [2].

Fortescue's capital expenditure (capex) for FY25 amounted to A$3.9 billion, with around A$2.6 billion allocated to sustaining and hub development, A$405 million for green initiatives, and A$324 million for exploration and studies. The company's focus on decarbonization aligns with its commitment to becoming a net-zero business by 2040 [2]. This strategic investment in green technologies positions Fortescue to capitalize on the growing demand for sustainable mining practices and renewable energy.

Looking ahead, Fortescue has provided FY26 guidance, projecting iron ore shipments of 195-205 million tonnes and capex of A$3.3-A$4 billion [2]. The company expects to maintain its operational efficiency and cost leadership, which will be crucial for navigating the cyclical nature of the iron ore market.

Analysts remain confident in Fortescue's ability to generate at least A$3 billion in cash profits annually, despite the dividend reduction. The company's valuation multiples suggest its share price is near its historical average, indicating that the market is not overly concerned about the near-term profit decline [3]. The market's focus on short-term profit declines overlooks Fortescue's long-term value creation and strategic reinvestment in decarbonization and green technologies.

In conclusion, Fortescue Metals' dividend reduction reflects its strategic shift towards growth and decarbonization. The company's operational discipline, cash flow resilience, and forward-looking decarbonization strategy make it a compelling long-term investment, despite the temporary setback in profit growth.

References:
[1] https://www.afr.com/companies/mining/fortescue-trims-forrest-family-dividend-to-1-24b-after-profit-slump-20250825-p5mplk
[2] https://www.mining-technology.com/news/australian-miner-fortescue-reports-41-decline-in-profit-in-fy25/
[3] https://www.ainvest.com/news/fortescue-41-profit-decline-strategic-buying-opportunity-market-mispricing-2508/