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A 31% dividend? That's the top end of FTSE 250 dividend yields at this time.
It's hard to ignore a return that could pay you back your initial bet in less than three years and could give you a tenfold return in less than nine years.
Such high returns may be a smoking gun, but this stock isn't about to cut your payout. Is it a purchase? We'll see.
Hop
The action in question is Diversified energy (LSE: DEC): An Alabama-based oil and gas company listed both in the United States and here.
Some things are immediately obvious.
Of course, there's the eye-catching 30.6% dividend yield. Only four other FTSE 250 stocks offer more than 10% to shareholders.
The market value of £468m also makes it one of the smallest companies in the index. Any drop in the share price could be wiped out.
Finally, the stock is plummeting: down 55% in the last year. This drop will have pushed up performance and is probably the key detail here.
Running away
So why have investors been fleeing stocks?
Well, Diversified's business model is squeezing the last drops out of aging and therefore cheap oil wells.
The practice has gotten the company into trouble. Its extensive portfolio of 65,000 wells must be cleaned and plugged at the end of its useful life.
The Democrats are after them. They claim the company is leaving billions of dollars in cleanup costs to state governments.
Snowcap Research shorted the stock after publishing a 39-page report claiming the company had underestimated these costs. Total short interest has increased fivefold since December.
Diversified's own reports give an average cost of $22,000 per retirement. Other sources cost it at more than $100,000.
In the midst of this fiasco, business is going very well. EBITDA margins of 50%, industry-leading decline rates and net debt to EBITDA of 2.4 times look attractive.
As for that dividend, the company wants to move on to buybacks, saying that the share price, “does not reflect asset quality or significant opportunities for the long-term strategy.”
24% performance?
The expected dividend yield is 24.2%, although I would say there is too much uncertainty to trust that figure.
And uncertainty is what will guide my own decision here. How much will it cost to clean the well? What kind of regulatory risk could we be seeing?
The threat here is not just to a couple of years of dividends, but to the entire business itself. What if it's simply not profitable to purchase these older wells?
Without solid answers to these questions, I will not invest.
