Down 37.6%, this FTSE 250 stock pays a 12.3% dividend yield! Tempting?

On paper, this FTSE 250 stock looks like one of the strongest dividend-paying companies I’ve come across. Should I be tempted?

| More on:
Smart young brown businesswoman working from home on a laptop

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ferrexpo (LSE:FXPO) is a FTSE 250 mining company, and it currently offers one of the most appealing dividend yields on the index, at least at first glance. So is this dividend sustainable and is the company worth me investing in?

The business

The problem is, Ferrexpo is a Ukraine-based iron-ore mining company, and the war has greatly impacted the firm’s earnings, and its viability as an investment proposition.

So while it might have some really interesting metrics right now — a 12.3% dividend yield and trading at 2.3 times earnings — red lights are flashing.

Some 70% of Ferrexpo’s mines are in war-torn Ukraine, and it’s by no means operating anywhere near full capacity.

Thankfully, Ferrexpo’s operations aren’t near the front line, but supply chain logistics and getting product to market — notably through the Port of Pivdennyi — has been challenging.

Source: Ferrexpo

A trustworthy dividend?

According to Hargreaves Lansdown, Ferrexpo has a dividend yield of 12.3%. That’s based on the fact that for the year 2022, the company paid $13.2 per share.

However, this looks likely to be misleading. Investors will likely only receive $3.3 per share for the financial year 2023. In turn, that equates to a dividend yield of just 3.5%.

And this shows us why we often need to be looking at forward metrics — forward dividend yield, forward price-to-earnings — in order to inform our investment decisions.

Betting on a recovery

My colleague Mark Tovey has high hopes for this stock, and appears to be betting on a recovery. But as he says, it’s a risky bet.

In the year ending December 31, 2021 — before the Russian invasion — Ferrexpo recorded basic earnings per share of $148.2. That’s almost double the current value of each share.

But these are exceptional circumstances and the company isn’t likely to be that profitable for some time, even if the war does conclude soon.

In fact, making an investment decision informed by earnings forecasts and other metrics is near-impossible given the uncertainty of the situation. And this is reflected in the fact that the consensus estimates for this stock really don’t make any sense at all.

The bottom line

Ferrexpo’s assets haven’t been damaged since the war. It’s got a strong cash position, insignificant debt, and it’s clearly more resilient than other Ukrainian firms. It’s also got world-class resources, and over 50 years of iron-ore reserves at current mining rates.

However, a two-year-long campaign against the country’s infrastructure has meant getting its iron pellets to market is far more challenging. The closure of the Black Sea ports is a major part of this. Previously it accounted for 50% of its export sales. If the war finished tomorrow, it wouldn’t be at full capacity for some time.

It’s also something of a gamble. We don’t know when this war is going to end, much as we fervently hope it will. For now, Ferrexpo’s not for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »