FTSE investors looking for a high second income from share dividends may find Energean (LSE: ENOG) increasingly difficult to overlook.
The group’s Mediterranean gas strategy continues to mature, and CEO Mathios Rigas plans to double the firm’s size over the next decade. A large proportion of this will include projects in energy-rich West Africa that will also diversify its geographical presence.
As such, Energean’s earnings are expected to grow exceptionally strongly in the next few years. This should continue to support market-beating, ultra-high dividends and huge share price gains too.
So, what sort of returns might investors expect?
How much earnings growth is projected?
One risk to Energean’s future growth is any sustained bearish gas price trend that could reduce the cash flow available for dividends. Another is a structural failure in any of its core drilling operations, which could do the same.
Nevertheless, analysts forecast its earnings will increase by a whopping annual average of 26.6% to end-2028 at least.
By that point, they expect Energean’s dividend yield will be a stunning 10.7%, although such yields can vary over time. That is more than triple the current FTSE 100 average of 3.1% and more than double the FTSE 250’s 3.4%.
How much could the second income grow?
Given the forecast 10.7% as an average, a £20,000 holding in Energean would generate £38,032 in dividends after 10 years. And after 30 years, that would rise to £468,581.
The numbers illustrate the extraordinary effect of dividend compounding over the 30-year lifetime of a standard long-term investment cycle. This simply involves reinvesting the dividends paid by the stock straight back into it.
By the end of 30 years, the value of the holding (including the initial £20,000 stake) would be £488,581.
And that would deliver a yearly second income (from dividend payments alone) of £52,278!
What about a share price bonus too?
History shows that share prices tend to converge to their ‘fair value’ over time. The best way I found as an investment bank trader to pinpoint the fair value of any stock is discounted cash flow (DCF) analysis.
This takes long-term cash flow forecasts for the underlying business and converts them into today’s value. When those forecasts are less certain, the discount applied to those cash flows increases.
Different assumptions here can produce varied DCF values, of course. But my DCF analysis, including a 7.7% discount rate, shows Energean shares are 65% undervalued at their present £7.25 price.
This suggests a fair value of £20.71, nearly three times where the stock trades now. On that basis, the original £20,000 holding would be worth £57,118 if the historical convergence of stock price to fair value continues and my DCF modelling holds good.
My investment view
Buying another energy stock (I already hold BP, Shell, and Harbour) would skew the risk/reward balance of my portfolio, so I cannot buy Energean.
I wish I could, as it ticks every box I want for an income stock — strong earnings growth, ultra-high dividend yield, and a huge undervaluation. ‘Double bubble’, as we used to say in trading — money made from two streams (dividends and share price).
That said, other similarly undervalued, high-yielding stocks have caught my eye in recent weeks.
Should you invest £5,000 in Energean Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Energean Plc made the list?
Simon Watkins owns shares in BP, Shell, and Harbour Energy.
This story originally appeared on Motley Fool
