There are very few dividend shares that have a double digit percentage annual yield, let alone one standing at 25%. One London dividend share has a yield that high – and has announced dividend plans that could see the total shareholder payout grow even further!
Is this too good to be true?
High-yield oil and gas company
The share is Ithaca Energy (LSE: ITH). While the company might not be a well-known name, it is no minnow. The FTSE 250 firm commands a £1.3bn market capitalisation.
It announced its half-year results today (22 August) – with some potentially cheering news for income investors. On the other hand, the financial results were something of a mixed bag, in my view.
Potentially good dividend news
As an investor, a 25% yield is a big red flag for me. Such an abnormally high yield can suggest the City doubts a company’s ability to maintain its dividend at the current level and has marked down the share price accordingly.
The City can be wrong though. Ithaca has been listed for several years and last year saw its maiden dividend payments. So possibly investors are still deciding how best to value the firm.
In its half-year results, the energy company declared its first interim dividend for this year. It reiterated its dividend commitment for this and next year (though such a “commitment” can be undone when it comes to future dividends… they are never guaranteed in reality).
Ithaca also said that it has “ambition for special dividends to increase total distributions to up to $500 million per annum”.
Grounds for caution
That would equate to around 29% of the current market capitalisation. In other words, if Ithaca delivers on its ambition, the dividend share’s already supercharged yield could move higher still.
But the results contained some warning signals of a business moving in the wrong direction. Compared to the same six-month period last year, statutory net income fell 34% and net cash flow from operating activities was down 19%. Total production fell sharply too.
It was not all bad. The company reduced its net debt by 28%, though at over half a billion pounds it remains substantial.
Strengths, but risks too
Ithaca has a proven business strategy of exploiting North Sea oil and gas assets that have increasingly fallen out of fashion with the big oil majors. It has scale, is profitable and is strongly cash generative.
But energy prices are volatile, posing a risk to future cash flows. Ageing assets can incur sizeable maintenance cost, while I see a risk of increasing tax and regulatory burdens eating into the profitability of producers in the British sector of the North Sea.
The company’s large majority shareholder could effectively decide to change its dividend policy for its own reasons, which though perfectly legitimate makes me queasy as a small private investor.
Ithaca might manage to maintain its mammoth dividend for years to come. But the yield here ultimately looks too good to be true on a long-term basis, as far as I am concerned. So I will not be investing.
This post was originally published on Motley Fool
