UKOG shares? I’d rather buy these FTSE 250 dividend growth stocks

UKOG shares appear to offer a poor risk/reward profile compared to these FTSE 250 dividend growth stocks, which are reporting record demand, according to Rupert Hargreaves.

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UKOG (LSE: UKOG) shares have been on a tear over the past 30 days. The stock is up around 22% since the end of May as investor sentiment towards the business has improved dramatically. 

However, the company’s long-term outlook remains uncertain. Indeed, it is still relying on the kindness of strangers to keep the lights on. UKOG recently raised £4.2m by issuing new shares to fund exploration and development activities. The money was also used to repay an outstanding loan of £1.75m. 

While the company has made a great deal of progress over the past year with its drilling and exploration activities, it’s still not self-sufficient. It is unlikely to reach this stage anytime soon. 

On the other hand, the companies behind FTSE 250 dividend growth stocks IG Group (LSE: IGG) and Plus500 (LSE: PLUS) are highly profitable. As such, they may offer better total returns than UKOG shares over the long term. 

UKOG shares suffer

Plus and IG have both benefited from the significant increase in stock market volatility over the past few months. In its latest trading update, IG said that high levels of client activity produced trading revenue for its fiscal fourth quarter of £259m. This was nearly double last year’s figure. 

Plus has seen a similar boom in activity. The London-listed broker reported revenue of $316.6m in the three months to March. In the same period last year, the company’s revenue was just $53.9m. 

Looking at these results, it’s no surprise that shares in the financial services’ firms have outperformed the market over the past 12 months. UKOG shares, on the other hand, have fallen by around three quarters over the same time frame. 

The company’s dire need for cash is to blame. Unlike IG and Plus, which are raking in the cash, UKOG has relied on issuing new shares to fund its business activities for many years. Until the firm starts generating strong, recurring free cash flows, this is unlikely to change. That means further dilution could be on the cards, which might lead to further declines in the shares. 

Dividend champions

IG and Plus are highly cash generative. For example, in IG’s financial year to the end of May 2019, the group generated £170m of free cash from operations. This allowed management to announce a higher than average total dividend distribution, which cost the firm £171m. It also ended its last financial quarter with £357m of cash on a balance sheet, enough to support the company’s current dividend yield of 5.4% for at least two years. 

Meanwhile, in Plus’s financial year to the end of December 2019, the company generated £127m of cash from operations. This allowed it to return £100m in cash to investors with dividends and another £47m with share buybacks.

The group also has a large chunk of cash on its balance sheet. The cash balance stood at £287m at the end of the first quarter, enough to support the firm’s 5.7% dividend yield for nearly three years. 

These figures suggest that IG and Plus may be better investments for your portfolio that UKOG shares over the long run. Their cash generative nature, market-beating dividends, and strong balance sheets imply that the shares can produce strong total returns in the years ahead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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