The Fortescue Metals Group Ltd (ASX: FMG) share price has been a positive performer over the last 12 months.
As you can see below, the mining giant's shares have risen almost 18% over the period.
Has the Fortescue share price peaked?
There are a couple of factors that will have a big say in whether the Fortescue share price rises further on comes crashing back down to earth. These are the price of iron ore and the Fortescue dividend.
The good news is that Goldman Sachs is feeling positive about the iron ore price. Last week, the broker commented:
The GS commodity team recently increased their iron ore price forecasts to US$120/t for 2023 (from US$100/t) with a 3m target of US$150/t (vs. spot at US$125/t) with the expectation that the seaborne market should swing into significant deficit of 43Mt in 1H23 on the back of lower seasonal supply from Australia and Brazil and an expected recovery in Chinese steel volumes.
If this proves accurate, it could potentially lend some support to the Fortescue share price in the near term.
Dividend outlook not so good
Another thing that could help prop up the Fortescue share price in the near term is its dividend. And while it is expected to be cut down meaningfully in FY 2023, it is still likely to provide investors with an above-average yield.
For example, Goldman Sachs is now forecasting a 22% cut to US$1.18 (A$1.79) per share, which equates to a fully franked 8.1% dividend yield.
However, whether income investors will be willing to hold onto its shares beyond the payment of this dividend is a matter for debate.
With Fortescue's spending on its decarbonisation ambitions expected to jump in FY 2024, its free cash flow will begin to dwindle and put huge pressure on its dividends.
It is for this reason that Goldman expects a further 47.5% cut to 60 US cents (91 Australian cents) per share dividend for that year. Based on the current Fortescue share price, this will mean a more modest 4.1% yield.
It's been a long time since Fortescue's shares have traded with that sort of yield, so it is conceivable that its shares will drop to a level that means its yield remains greater than 6%. For that to happen with this forecast dividend, the Fortescue share price would need to be trading at approximately $15.00. This is broadly in line with Goldman's sell rating and price target of $15.50.
Looking even further ahead, unfortunately, Goldman expects a further dividend cut to 40 US cents (61 Australian cents) per share in FY 2025. So, for its shares to offer a 6% dividend yield, they would need to drop to approximately $10.00.
All in all, this could mean the Fortescue share price remains elevated for the next six months, before starting a significant decline once its final dividend has been paid in September.
