What is a high-yield stock? Some would say a dividend yield over 7% qualifies, while others may say 10% is the threshold. I doubt anyone would disagree that Amedeo Air Four Plus (LSE: AA4) qualifies. Analysts reckon it will reward shareholders with a 15.1% yield in 2023, and 17.5% in 2024.
If I see an eye-popping potential return like that, I am always interested. It could seriously boost my portfolio’s performance if realised. So, it’s worth taking a closer look.
Flying high
Amedeo, a specialist fund, was listed on the London Stock Exchange in 2015. It took the cash raised from the equity (and debt) issue, bought two A380 aircraft, and leased them to Emirates. By 2018 and after further equity and debt raises, it had amassed a fleet of 14 jets of which eight were leased to Emirates, two to Etihad, and four to Thai Airways.
Etihad bought its two leased aircraft outright on 24 February 2020. That was fortunate as, within weeks, flights were grounded worldwide due to the coronavirus pandemic. The cash came in handy as the company had to start granting lease payment holidays and restructuring some entirely. Still, it didn’t stop it from cancelling all returns of capital to its shareholders.
High-yield stock warning
The company was confident enough to start paying a quarterly dividend of 1.25p on 31 January 2022. This was increased through 1.5p to 1.75p from April 2023 onwards. Though past performance is not an indicator of future results, that’s not far away from the initially planned dividend of 2.06p, which analysts think the company will hit again in 2024.
Although the Amedeo share price is almost double what it was two years ago, it is a third below its pre-pandemic value and half what it was at listing. Investors do appear to lack faith.
Thai Airways declared bankruptcy during the pandemic and is still in the hands of the administrators. Its lease payments are a big risk. If lost, I think Amedeo would struggle to find a new lessee for those four aircraft. The airline industry is not back on its feet yet and that is particularly true for the long-haul sector. Amedeo’s planes are all long-haul models.
The most recent company statements talk about depressed long-haul aircraft prices. Given that Amedeo is highly leveraged, as it financed the purchase of aircraft with about twice as much debt as equity, in the event of a forced sale of aircraft the shareholders will not be the winners.
Amedeo Air Four Plus shares
I think investors are right to be cautious about this stock. Its high yield is probably right where it needs to be given the risks. There are also some other curiosities with this stock that I am not too keen on.
The company returns capital to shareholders via compulsory share redemptions. There have been three of these so far, the latest at the beginning of this month. Then the company called back one share for every eight owned for 64.5p. Now that price was well above the market price of about 42p, and in the past that has always been true if perhaps not so pronounced. Still, I am not comfortable with this mechanic and on balance, I am not going to be buying this stock for my Stocks and Shares ISA and will look elsewhere.
