Stocks to buy: this FTSE 250 energy company’s rising dividend yield is near 4.4%

I think this is a stock to buy because of its strong niche in the UK’s modern-day energy infrastructure and its high, cash-backed dividend yield.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

sdf

With the share price near 388p, FTSE 250 energy company Drax (LSE: DRX) is paying a shareholder dividend yielding around 4.4%. And there’s a record of robust cash generation supporting the shareholder payments.

The dividend has been rising since 2017. And City analysts expect a further generous single-digit increase in 2021. Meanwhile, since listing on the stock market in 2005, Drax has transformed itself into a cleaner energy company.

Why I think Drax is a stock to buy

The Drax coal-fired power station used to belch out great quantities of harmful emissions. But these days, we can forget about its business hurting the environment as much as it once did. In 2020, the company announced that coal-fired electricity generation would end in March 2021, after almost 50 years of operation.

In today’s full-year results report, chairman Philip Cox said the company’s purpose is to enable a zero-carbon, lower-cost energy future.” And now, the Drax power station is fired by sustainable biomass. And it’s all because of a remarkable and sustained policy of investment over the past few years.

Since becoming a listed company, Drax has expanded its operations and diversified beyond its single-site power station in North Yorkshire. The business even includes biomass production facilities in the US. But in January, the firm sold its gas generation portfolio, thus further reducing its carbon emissions. And on 8 February, the directors announced the proposed acquisition of Pinnacle Renewable Energy. The firm manufactures and distributes sustainable, low-cost biomass industrial wood pellets in Canada and the US.

Cox reckons Pinnacle will “position Drax as the world’s leading biomass generation and supply business.”  The company aims to become not merely a carbon-neutral business but a carbon-negative operation by 2030.  And the key to that ambition is the use of Bioenergy with Carbon Capture and Storage (BECCS) technology. The idea is to fire the boilers in power stations with biomass and capture the CO2 emissions for permanent storage (as the name suggests!)

A strong niche in the UK’s energy market

I think Drax has carved out a strong and relevant niche for itself in the UK’s modern-day energy infrastructure. Cox expects Drax to play a major role in delivering the UK’s legally binding objective to achieve net-zero carbon emissions by 2050.”

And I’m attracted to Drax as an investment proposition. Today’s figures for 2020 show a small increase in adjusted Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) from £410m in 2019 to £412m. And the directors increased the total shareholder dividend for the year by just over 7.5%, signalling their confidence in the outlook.

However, the share price has more than tripled since the lows of last spring. And the company has a fair amount of debt. As with all shares, this is not without risk. Perhaps the biggest is the possibility of a fluctuating share price ahead. Indeed, City analysts predict a decline in earnings of around 15% in the current trading year. The company continues to plough a lot of money back into the business and growth in earnings could be hard to achieve ahead. But I’m focused on the dividend and see this as a potential stock to buy and hold for the long term in a diversified portfolio.


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.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Low P/E ratios, yields up to 9%! Are these the FTSE 250’s best value stocks?

These FTSE 250 shares offer exceptional all-round value on paper. But are they too good to be true for investors…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how a 39-year-old could aim for a million by retirement, by spending £900 a month on UK shares

Our writer digs into the theory and practicalities of buying high-quality UK shares regularly to aim to retire as a…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

See how much a 50-year-old should invest to get a £1k monthly passive income at 65

Even at 50, there's still time to build a big enough stocks portfolio to generate a serious passive income at…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

With P/E ratios below 7, are these undervalued FTSE shares bargains — or value traps?

Low valuations aren’t always the bargains they seem. Mark Hartley takes a closer look at two FTSE shares trading at…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 simple strategies that can help drive success in the stock market on a small budget

Christopher Ruane runs through a trio of strategic moves he reckons can help an investor as they aim to build…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

2 growth stocks backed by this British fund that’s soared 77.8% in just 3 years!

Our writer likes the look of this under-the-radar fund, especially with a pair of exciting growth stocks near the top…

Read more »

Shot of an young mixed-race woman using her cellphone while out cycling through the city
Investing Articles

Is there value in Baltic Classifieds — a soaring growth stock that brokers are buying?

Baltic Classifieds has surged after broker upgrades. Mark Hartley asks whether this FTSE 250 stock is really worth buying now.

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20k in an ISA? Here’s how it could be used to target £423 of passive income each month

Earning money from dividends in an ISA is one way to set up passive income streams. Our writer explains how…

Read more »