The average FTSE 250 dividend yield currently sits at 2.6%, but one stock stands head and shoulders above the rest. Swiss-based commodity trading and mining firm Ferrexpo (LSE: FXPO) rewards shareholders with an annual dividend yield of 25.32%. This is based on dividends paid out during last 12 months and the latest share price.
However, the mammoth dividend yield can largely be explained by the substantial recent fall in the Ferrexpo share price. It’s dropped nearly 40% in 2022. Is the passive income appeal sufficiently tempting for me to buy shares of this company despite the considerable risks? Let’s explore.
The risks for Ferrexpo shares
Ferrexpo is the world’s third-largest exporter of iron ore pellets. The miner’s production takes place at its three mines near Horishni Plavni, Ukraine. This year’s share sell-off for Ferrexpo was triggered by the Russian invasion and I view the ongoing war as the predominant risk facing the business.
In its FY2021 financial results, the group confirmed its operations haven’t been a centre of armed conflict. However, there’s a risk this could change if the war escalates. A further concern is that Ferrexpo has “temporarily lost the ability to export its products via the Black Sea”, forcing the company to rely on river routes and rail instead.
In addition, there are currency risks facing this stock that worry me. The functional currency of Ferrexpo’s operations is the Ukrainian hryvnia, which has historically represented approximately half of its operating costs. Developments in the war could cause significant movements in forex markets, which would in turn impact Ferrexpo’s profitability.
Silver linings
Despite an uncertain backdrop, Ferrexpo shares are arguably cheap at present. The company has a price-to-earnings (P/E) ratio of just 1.59. Importantly, the group’s net cash position was approximately $159m at the end of Q1, 2022. For me, this should assist the business in distributing dividends as well as bolstering its ability to survive a prolonged period of difficulties.
Ferrexpo’s target is to deliver 30% of free cash flow as dividends each year. If Ferrexpo’s financials prove resilient, the potential total return from this stock could make it an attractive investment, although the company will have to successfully navigate significant risks to realise this.
In addition, there’s a possibility iron ore prices could rise, particularly if China eases its Covid-19 lockdowns. The country is the world’s largest importer of iron ore by a considerable margin. Ferrexpo is well placed to benefit should this materialise. For the past three years, the company’s sales volume to China and South East Asia made up between 28% and 56% of its global total.
Finally, any de-escalation in hostilities would be welcome news for everyone. While far from certain, it’s worth considering that this would likely lift the Ferrexpo share price.
Would I buy this FTSE 250 dividend stock?
With inflation on the rise and fears of a stock market crash mounting, I’m concentrating on reducing risk in my portfolio for now.
There are undoubtedly tempting reasons to buy Ferrexpo shares, not least the 25+% dividend yield. However, the high risk/reward profile means I won’t be adding it to my portfolio today.
