[ad_1]
Passive income seekers are spoilt for choice in todayâs FTSE 250, but few yields look as eye-catching as Ithaca Energyâs (LSE: ITH). This income is money earned with little effort, of course.
With a current 16% dividend yield, the North Sea energy operator looks like a veritable cashâflow machine to me.
Recent acquisitions and a robust hedging programme appear supportive of its income. But strong tax headwinds remain.
So, how sustainable is Ithacaâs dividend engine, and how much passive income could it generate?
Dividend sustainability
In 2024, Ithaca paid a total dividend of 34 cents (25p), equating to a current yield of around 16%. Of course, dividend yields move inversely to share prices, so the payout can rise, fall, or hold steady.
An added complication is currency, as the exchange rate between the US dollar and sterling shifts constantly. While some firms — such as BP — fix a permanent sterling equivalent for each dividend, many others, including Ithaca, do not.
However, taking both share price and FX into account, analysts currently forecast Ithacaâs dividend yield at 12.3% in 2026 and 11.3% in 2027.
By comparison, the present FTSE 250 average is 3.5% and the FTSE 100âs 3.1%.
How does the core business look?
The powerhouse behind any firmâs dividends is earnings growth.
A key risk for Ithaca is the UKâs âEnergy Profits Levyâ (EPL) — the âwindfall taxâ. Extended until 2030, it has lifted the effective tax rate on North Sea producers to around 78%.
Indeed, Ithacaâs 2024 results saw earnings before interest, taxes, depreciation, amortisation and exploration expenses falling 18.4% year on year to $1.405bn (£1.06bn). This was driven by lower oil and gas prices and reduced production.
But its net profit dropped 29% (to $153.2m), after a $351m tax payment, most of which was the EPL.
That said, Ithaca expects 2025 operating costs to remain in the low $20 per barrel of oil equivalent (boe) range. And it forecasts its oil and gas production will rise to a maximum 115,000 boe per day (kboe/d) from 105.5 kboe/d. This follows its $975.8m October acquisition of Italian oil and gas giant Eniâs UK assets.
Analysts forecast the firmâs earnings will grow by a standout 18.4% a year to end-2027. This should underpin ongoing high dividend yields.
High passive income generator
Investors considering a £20,000 stake in Ithaca would make £41,586 in dividends after 10 years. This is given the aforementioned caveats and using the most conservative forecast over the next three years.
This is based on the dividends being reinvested in the stock (âdividend compoundingâ) and the 11.3% yield.
After 30 years on these twin bases, the dividends would rise to £563,982.
Including the £20,000 initial investment, the holding would be worth £583,982.
And this would pay an annual passive income of £65,990 at that point.
My investment view
The sheer effort of not buying this stock is giving me a pain behind the left eye. I have no idea what that means, but it cannot be good.
In any event, I will not succumb. I already have several energy firm holdings, and another would disrupt the risk-reward balance of my portfolio.
Nevertheless, for others without such a problem (the risk-reward balance, not the eye thing) I think the stock is well worth considering.
The post With its 16% dividend yield, is it time for me to buy this FTSE 250 passive income star? appeared first on The Motley Fool UK.
Should you invest £1,000 in Ithaca Energy right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Ithaca Energy made the list?
.custom-cta-button p
margin-bottom: 0 !important;
color:#cc0000;
div.entry-footer div.textwidget div.braze-content-card div.wp-block-custom-block-collection-presentational-card
padding: 0 !important;
margin: 0 !important;
More reading
- How much do you need in a FTSE 250 portfolio to target £2,147 in monthly income?
Simon Watkins 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.
[ad_2]
Source link