Diversified Energy Company (LSE:DEC) is the highest-yielding stock in the FTSE 250. This makes it particularly attractive to income investors like me.
If the dividend is maintained at its current level, the company’s shares are presently offering an amazing yield of 23%.
This impressive return has been helped more by a notable decline in the company’s share price than an increase in the amount paid to shareholders. The latter has remained unchanged for the past five quarters whereas its stock price has halved since December 2022.
It fell 14% on 18 December 2023 after a letter from a committee of the US House of Representatives was published claiming the company has “vastly underestimating” the cost of cleaning up its oil and gas wells when they are retired.
But I see this as a buying opportunity.
Here are three reasons why.
Recycling assets
Firstly, the company’s strategy of acquiring existing fields requires less capital investment than its competitors. This leaves more cash available to return to shareholders.
DEC seeks to increase the output of its wells and extend their useful lives. Although ethical investors wouldn’t want anything to do with the business, I think improving existing assets — rather than developing new ones — is better for the environment.
However, it has spent $2.6bn on 24 acquisitions since its IPO in 2017. A significant proportion of this has been funded by debt, which means it’s highly geared.
But the directors are closely monitoring the situation and regularly report on progress against their target of keeping net debt at less than 2.5 times adjusted earnings (currently 2.3).
Although something to watch, I don’t think the company’s borrowings are out of control.
Growing nicely
Secondly, DEC has an impressive track record of growing its dividend every year since listing.
For its 2023 financial year, it’s expected to return 56% more than it did five years earlier.
Although dividends are never guaranteed, this gives me some comfort that the present level of payout is sustainable.
Guaranteed revenue
Thirdly, the company enters into contracts to fix the selling price for the majority of its production. For example, in 2023 it’s expected to hedge around 85% of its gas output.
The downside of this strategy is that it will never generate ‘windfall’ profits due to high energy prices.
But the benefit for investors is that the margin, and therefore cash flows, will be steady and predictable. This helps reduce the possibility of a cut in dividend due to volatile commodity prices.
And it ensures there’s sufficient cash to service its debt pile.
What I’d do
If I was in a position to do so, I’d invest in the company. A sum of £10,000 would get me 854 shares in DEC. That would generate £2,357 a year — £196 a month — in passive income.
Of course, the letter from the US politicians is a concern.
But the allegations stem from an old newspaper report published in 2021. According to the company, the article “inaccurately described numerous items“.
It has also pointed out that its accounts are subject to audit. And that it’s received a gold rating from two independent bodies monitoring emissions.
The company has issued a robust defence and plans to cooperate with the investigation.
For the reasons outlined above, the current share price and yield looks like an opportunity to me.
