A 29% dividend yield could be the highest I’ve ever seen on the FTSE 250.
I’m going to dig into this company and tell you whether I think it’s the best investment of my lifetime.
Brilliant stock picks don’t come around very often. And we don’t have to be geniuses to make money in the stock market. Just ask Warren Buffett.
“Investing is not a game where the guy with a 160 IQ beats the guy with a 130 IQ”, he famously said. “What you need is the temperament to control the urges that get other people into trouble.”
So what’s going on here?
Diversify
Diversified Energy Company (LSE:DEC) is a mid-sized, £500m market cap company.
Its main business is acting as a US onshore natural gas producer and transporter.
For shareholders, the five years between 2017 and 2022 were fairly spectacular. The share price more than doubled in that time.
And it looks at first glance like the business is using its money very well. Data suggests in the last 12 months it has a healthy 46% return on capital.
Dropping off
The shares peaked at around £22 per share in August 2022. But since then, the share price has been sinking like a stone.
And it’s not entirely clear why.
The shares have crashed 20% since the start of 2024, and are down 60% in the last 12 months.
It could be that investors are selling out of perceived risky stocks ahead of a coming recession. But I wouldn’t bank on that being the only reason.
Debt deals
The company reports its earnings and dividends in US dollars, rather than pounds sterling. In its last full-year results, it reported net debt of $1.4bn, with cash of just $7.3m.
With US interest rates rocketing to 15-year highs in 2023, companies of all stripes have been forced to pay more on their debts. So it’s possible the market believes holding this stock is substantially riskier than before.
This does not take into account any specific debt deals the company has made.
In October 2023, the company cancelled plans to sell its shares on the New York Stock Exchange after continued falls in the share price.
Moving out
In December 2023 bosses made the unusual move of undergoing a 20-for-1 share consolidation, which saw the declared quarterly dividend of 4.375 cents per share jump up to a mammoth 87.5 cents per share.
At the current share price falling to around £9.60, that makes a 29% dividend yield.
In general, markets respond poorly when companies make moves that are not heavily telegraphed in advance.
The shares did list in New York in late December 2023.
Then in early January, the company raised $200m from selling off some of its natural gas assets in Appalachia.
In a 16 January statement, the company said it was baffled by the sudden crash in its share price. There has been “no material change” to its financial or operating conditions, it said. This is the same statement the company put out in October 2023, after heavy selling.
What to do now
You probably know my conclusion already.
For me, buying shares in a company with 29% dividend yield would be giving in to “the urges that get other people into trouble”.
