This FTSE stock is yielding 16.3%! Should investors consider buying it?

Earlier this week I looked for high yielding stocks in the FTSE 350 index. According to my data provider, the highest yielding stock was Ithaca Energy (LSE:ITH) with a whopping 16.3% yield

So what’s the story behind this stock? And should investors consider buying it for income?

An Introduction to Ithaca Energy

Ithaca Energy is a £1.3 billion oil and gas company operating in the North Sea.

Founded in 2004, it is now one of the largest independent oil and gas companies on the UK Continental Shelf (UKCS), ranking second in terms of resources and third in terms of production.

Ithaca Energy entered the market in 2022 via an initial public offering (IPO). However, since then it has not been a good investment as its share price has fallen from 250p to 124p.

A closer look at the 16.5% yield

The yield figure I quoted here is based on consensus dividend forecasts for 2024. That currently stands at 25.9 cents per share.

However, these forecasts should not be taken lightly. It is worth noting that earnings per share this year are expected to be only 14 pence per share. In other words, profits will not cover the expected payout.

Another problem is that the company could be about to issue a ton of stock as part of a deal to buy oil and gas assets from Eni in the near future. This could significantly reduce the dividend per share (and also significantly lower the stock price).

It is also worth noting that while the company expects to pay $500 million in dividends for 2024, it has stated that all dividends are subject to operational performance and commodity prices as well as the combined refinancing of the group and the availability of distributable profits.

Overall, there is therefore some uncertainty regarding the dividend of this stock.

Political risk

But that’s not the only uncertainty. Another factor that makes the investment issue a bit opaque is the political environment.

If Labour wins the general election, the fact that the party is not a big supporter of the oil and gas industry could become a problem.

The story continues

For example, in his manifesto he said he would halt the granting of new oil and gas exploration licenses and increase the windfall profits tax on oil and gas companies by three percentage points.

It is worth noting that the Norwegian energy giant Equinor US President Donald Trump recently suspended the sale of a stake in the Rosebank oil project in the British North Sea due to budget uncertainty ahead of the election. But attitudes could also change once he takes office.

My opinion

I don’t want to sound too pessimistic about Ithaca Energy’s stock. The deal with Eni certainly looks interesting. With the deal, the company believes it has the potential to increase production to 150,000 barrels of oil per day by the early 2030s, up from about 70,000 in 2023.

But I would approach this stock with caution. With share dilution looming and a potential new government coming in, it is difficult to know how the stock price will move.

Personally, I think there are better (and safer) stocks to buy for income generation.

The article This FTSE stock is yielding 16.3%! Should investors consider buying it? appeared first on The Motley Fool UK.

Further reading

Edward Sheldon has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the writer and 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 broad range of ideas makes us better investors.

Motley Fool UK 2024