High dividend yields are very eye-catching. However, high yields can sometimes be unsustainable, especially if the dividend isn’t growing but the share price is falling. So when I saw that there was a FTSE 250 stock with a 13.66% yield, it definitely warranted a closer inspection.
A high-flyer
The company in question is Ithaca Energy (LSE:ITH). The UK-based oil and gas company stock has fallen by 4% over the past year.
As far as business operations go, it’s focused on exploration, development, and production in the UK North Sea. By extracting crude oil and natural gas from its offshore fields, it makes money by selling the products to refineries and gas distributors.
Unlike some stocks from this sector that are yet to produce revenue, Ithaca has sites that are fully operational. This is a key factor when considering it as a dividend share. After all, if finances aren’t strong, dividends are usually one of the first areas that get cut to help ease cash flow pressure.
The latest company update detailed a positive outlook going forward. The first oil from the Talbot project is anticipated before year-end, with drilling at the Jocelyn South exploration well “offers immediate potential production if successful”. If these do come online, it could further boost revenue and filter down to a higher dividend per share.
Risks remain
The dividend policy states that the management team aim to provide “annualised dividends of 15-30% of post-tax net cash from operating activities”. So, naturally, if operations do well and income increases, the dividend will rise.
However, this can be viewed as a risk. Ithaca operates in a volatile sector. Oil and gas prices move up and down sharply. It could drop based on natural weather related events, geopolitical tensions in the Middle East or even demand from sectors like travel and tourism. None of these factors is within Ithaca’s control. So if the prices drop later this year, it could reduce revenue and ultimately mean that the dividend falls.
Another risk is the share price. Energy stocks like Ithaca can jump around based on speculation regarding future projects. This means that if an investor buys now and sentiment around new projects sours, the investor could be left holding a large unrealised loss from the share price, even if the dividend gets paid.
Risk versus reward
I think that Ithaca is undoubtedly a high-risk, volatile stock. This is the case whether an investor is considering it for capital gains or income. However, the risk is balanced by the size of the potential reward. A yield in excess of 13% is considerable. When I compare it to the yield on other income paying assets, it’s not to be ignored.
Therefore, for an investor that’s happy with the risk level, I do think that this is worth considering today.
This post was originally published on Motley Fool
