FTSE 250 natural gas giant Energean (LSE: ENOG) currently generates a massive 9.9% dividend yield. This derives from its $1.20 (92p) dividend last year and the present share price of £9.31.
This far outstrips the FTSE 250’s 3.5% and the FTSE 100’s 3.1%. Indeed, there are very few shares of such quality that deliver such a return, in my view.
But is this dividend yield outperformance set to continue?
What’s the dividend yield outlook?
Consensus analysts’ forecasts are that the firm will pay a 92p equivalent dividend again this year, and next. In 2027 though, this is projected to increase to 95.4p. On the current share price, this means another two years of a 9.9% dividend yield, and then 10.2%!
These numbers are not rogue figures, incidentally. Energean paid the same $1.20 dividend in 2023, split into four 30-cent interim payments.
It has already made two interim payments of 30 cents this year, with two more expected.
What’s powering the dividends?
The engine of dividend (and share price) gains for any firm is growth in earnings. A risk to these for Energean is any sustained significant fall in natural gas pricing in the coming years.
However, analysts forecast that its earnings will grow by a strong 11.7% a year to end-2027.
This looks well-supported by its latest full year 2024 results, in my view. These showed strong operational growth, record production, and robust financials, underpinned by long-term gas contracts.
More specifically, revenue soared 25% year on year to $1.779bn. Earnings before interest, taxes, depreciation, depletion, amortisation, and exploration expense (EBITDAX) jumped by the same amount to $1.162bn. This is a version of EBITDA used by gas and oil firms to include specifics relating to exploration and development costs.
So how much dividend income can it make?
Investors considering a £20,000 stake in Energean would make £33,607 in dividends after 10 years. This is based on the current average 9.9% yield. It also factors in dividend compounding being used.
On the same twin bases, the dividend income would jump to £365,117 after 30 years. I see this as the end point of a standard 30-year investment cycle. It begins around 20 years of age and ends around 50, with plans for early retirement.
Including the initial £20,000 investment, the value of the holding would be £385,117 by then. And this would generate a yearly dividend income of £38,127 at that stage!
My investment view
I am seriously itching to buy this stock. Its strong growth prospects should underpin further gains in its already huge dividend yield. This should mean even greater dividend income streams in my retirement.
The only problem I have here is that I already have holdings in BP, Shell, and Harbour Energy. So another oil and gas firm added to my portfolio could unsettle its overall risk/reward balance.
I may be able to talk myself into it at some point though. I am looking at its share valuation, and a discounted cash flow valuation shows it is 71% undervalued at its current £9.31 price. This means its ‘fair value’ is £32.10, which is not helping my self-control.
In any event, for investors without this problem, I think the stock is extremely well worth considering.
