Thanks to sky high coal prices, owners of New Hope Corporation Limited (ASX: NHC) shares have been rewarded handsomely with big dividends this year.
Will this trend continue and should you buy the ASX 200 coal miner's shares?
Should you buy New Hope shares for the dividends?
According to a note out of Morgans, its analysts believe New Hope shares offer a lot of value at current levels.
This morning the broker has retained its add rating with a trimmed price target of $7.00. Based on the current New Hope share price of $6.45, this implies potential upside of 8.5% for investors.
However, that isn't even half of the story! In fact, it's less than a third of the story when it comes to potential returns.
The note reveals that Morgans expects the New Hope dividend to come in at $1.20 per share in FY 2023. This represents a massive fully franked 18.6% dividend yield for investors, which stretches the total potential return to 27%.
What else did the broker say?
Morgans believes New Hope may not stop at a $1.20 per share dividend. It also sees potential for an on-market share buyback to boost capital returns even further thanks to its ballooning cash balance. It explained:
We forecast accumulation of ~$1.75bn of net cash by end FY23 pre dividends. If we exclude $250m as a balance sheet buffer, then plausibly +$1.5bn ($1.59ps) is available for distribution via the announced onmarket buyback (up to $300m) and dividends. We think our current $1.20ps FY23 dividend forecast is fair given on-market buying is now in play, though it's possible the on-market will wait/rank behind potential notes re-purchases.
NHC currently offers a ~27% 12-month base case total return, but with clear upside leverage to higher-than-expected coal prices, driving upside risk to excess cashflows and fully franked dividends.
