A FTSE 250 stock with a yield of 21% sounds almost too good to be true.
But with an expected dividend this year of at least 17.5 cents (14.4p), and a current share price of 66p, I can confirm that the stock of Diversified Energy Company (LSE:DEC) is at this level.
However, this doesn’t automatically mean it would make a great investment.
Freefall
DEC’s share price has fallen 26% since 1 September 2023. And from the start of October 2023, it’s down 17%.
The company issued a statement on 5 October 2023 noting “the recent decline in its share price” and confirmed “it is unaware of any operational or company specific reason for this share price movement“.
This volatility had helped push the yield higher. But the company has always paid a generous dividend.
Shareholder returns
Looking back over the past 22 quarters, it’s never been cut. For the first quarter of 2018 it declared a payout of 1.73 cents per share.
This has risen steadily over the years and for Q2 2023 it was 4.38 cents. That’s an impressive increase of 146%.
Even when the company’s share price was at its 52-week high of 138p, the yield was 10.4%.
Approach
But the company’s strategy of buying gas and oil fields in the US, and then selling the output, is not fashionable. Many ethical investors are uncomfortable with this activity. Perhaps this explains the decline.
Purchasing existing assets is a lot cheaper than developing new ones. And it’s a way of quickly generating revenue and profits.
As it sells at pre-agreed fixed prices, the business has benefitted less than other energy companies from rising prices. Although this means it’s missed out out on some bumper profits over the past couple of years, it does ensure that its revenues are stable and predictable.
Debt
Since 2017, DEC has made 22 acquisitions at a cost of $2.7bn. That’s why its borrowings are high — $1.5bn at 30 June 2023.
With net debt at 2.4 times’ adjusted pro-forma earnings, it’s something that needs to be monitored closely.
As I would expect, the directors are aware of the high gearing and intend to keep net debt below 2.5 times.
What should I do?
I’m tempted to buy shares in DEC because I like high-yield dividend stocks.
But I’m concerned that the share price appears to be in freefall. The directors’ apparently reassuring statement that they don’t understand why it’s falling didn’t help very much.
Some investors, who like to use charts to identify trends, subscribe to the ‘Three White Soldiers’ theory.
They believe that an indicator of a bear run coming to an end is when — for three consecutive days — a stock’s opening price exceeds the previous day’s open, ideally in the middle price range of the preceding day. The closing price should also move upwards for three days.
This sounds complicated. But for DEC, this last occurred on 14 September 2023.
And since then, the stock is down 25%! No wonder I’m sceptical about some of these theories.
I don’t need an expert to tell me that there’s currently a lack of appetite among investors for the company’s shares, despite its massive yield.
That’s why I’m going to wait a few weeks before taking another look.
