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Fortescue Metals Group chief Nev Power says the iron ore producer will consider increasing its payout ratio this financial year after declaring a bumper 20¢ dividend for the first half.
The dividend boost, up from 3¢ per share in the first half of 2016, was driven by a 283 per cent surge in the miner's net profit to $US1.2 billion following its determined pursuit of lower costs and a helpful increase in iron ore prices.
It will deliver the company's chairman and largest shareholder, billionaire Andrew Forrest, a $207.8 million pay day.
Mr Power told The Australian Financial Review the stronger dividend was appropriate considering Fortescue, once heavily burdened by debt, had reduced net debt to $US4 billion, with gross gearing at 36 per cent.
"Our strategy is to prioritise debt pay down, make sure we have investment in the long-term sustainability of our business, generate strategic options for future growth and generate returns for shareholders," he said.
"It is a matter of setting the right balance between all those factors."
Top of the range
At 38 per cent of net profit, the 20¢ payout was at the top end of Fortescue's dividend policy of returning between 30 and 40 per cent of profits to shareholders and came after its larger rivals BHP Billiton and Rio Tinto both declared better than expected dividends.
Mr Power said if conditions remained stable, the board would consider reviewing the policy before the end of the financial year.
"Given where we are in terms of the debt pay-down, between now and when there would be a final dividend considered, all of those conditions will be taken into account," he said.
"But I think certainly that the conditions are there and if the performance continues to be strong then that will all be taken into account."
Bell Potter analyst David Coates said the risk to Fortescue's payout ratio was "to the upside".
"The balance sheet is in increasingly good shape, their chairman and No.1 shareholder loves a dividend and I think they have every reason to look at increasing it," Mr Coates said.
Remaining disciplined
However Mr Power, who all but ruled out a buyback or special dividend, reinforced the company would remain cautious given its expectation iron ore prices would ease.
"We have been very disciplined in making sure we have done exactly what we have said we are going to do so we are not reacting to a particular market condition or changing our strategy at this point," he said.
The iron ore spot price hit $US94.86 per tonne on Tuesday night, its highest level since 2014. Mr Power said the price represented a "cyclical high" and he expected it to cool.
Stronger prices have enabled Fortescue to funnel free cash into debt repayments, which Mr Power said the company would continue to prioritise, adding that paying off all of its debt was "not out of the question".
"In terms of whether we pay it all down or not we are quite relaxed about becoming net cash on the balance sheet and then consider what the options are for us going forward," he said.
Fortescue's net profit soared 283 per cent to $US1.2 billion in the six months to December 31, up from a profit of $US319 million a year earlier.
The miner's revenue climbed 34 per cent to $US4.5 billion and its underlying earnings before interest, tax, depreciation and amortisation doubled to $US2.6 billion.
Debt reduction before revision
Patersons Securities head of research Rob Brierley said Fortescue now had a strong balance sheet but it was far from being "lazy".
"I think while the iron ore price is elevated they will harvest cash and put that towards reducing debt... then over time look at ratcheting up the dividend policy when they have debt a little bit more under control," he said.
Shaw and Partners analyst Peter O'Connor agreed the payout ratio could reasonably be revised to between 40 and 60 per cent of profits, similar to BHP and Rio, but said he thought further debt reduction was important first.
"Fortescue is at a really important juncture," Mr O'Connor said.
"Nev and Steve [Pearce, former chief financial officer] have set this company up really well – they have lowered costs, delevered and are now paying a chunky dividend.
"They are at that point where they have to make decisions about what comes next."
Shares in Fortescue closed down 19¢ at $6.98.