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?
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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.
