New Hope Corporation Limited (ASX: NHC) shares could pay an incredibly high dividend yield this year. But is it the best value S&P/ASX 200 Index (ASX: XJO) stock out there?
It's not often that we'd think that a stock that has risen by more than 150% in the last year could be a contender for best value. But it has a good shot.
As one of the largest ASX coal shares, it's not going to be a popular option for some investors.
However, it's worth pointing out that ASX 200 coal shares are currently making a bucketload of cash amid much higher energy prices.
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Latest quarterly update
In the three months to October 2022, the business reported that thermal coal prices reached another record of US$412.72 per tonne, which was a 215% increase against the comparative quarter the previous year.
Within that quarter, its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was up 167% year over year.
This meant the business finished with a cash balance of A$1.8 billion, as well as trade receivables of A$139 million.
The company is swimming in cash at the moment. That's why it decided to announce a $300 million share buyback – the company said this "represents an opportunity to enhance the value of the remaining shares".
New Hope noted that it "still maintains a significant balance in its franking account". This implies there is scope for more big dividends.
Dividend estimate for FY23
On Commsec, the current projection is that the business could pay an annual dividend per share of $1.73.
At the current New Hope share price, that suggests the business could pay a dividend yield of around 30%, or 42% grossed-up when franking credits are included in the calculation.
That is an enormous yield. The Commsec projected numbers only suggest a dividend payout ratio of 75%. So why is it so big?
It's down to the exceptionally low price/earnings (P/E) ratio.
New Hope is expected to generate $2.30 of earnings per share (EPS) in FY23. That means the New Hope share price is valued at just 2.5 times FY23's estimated earnings.
The FY23 numbers make it seem like an exceptional idea.
But coal prices aren't expected to stay this strong forever.
EPS is expected to drop by 20% in FY24 and then by another 33% in FY25.
Using the far-off projections, the New Hope share price is valued at 4.7 times FY25's estimated earnings and a grossed-up dividend yield of 15%.
So, the EPS is expected to almost halve, while the dividend could drop by around two-thirds.
Foolish takeaway
The tricky thing is knowing where the coal price is going to go. If the coal price drops off quickly, then share price pain may not be worth the dividends. But, if the coal price is stronger than some expect, it could mean this ASX 200 share's valuation is incredibly cheap.
No one could have predicted that the coal price would soar in 2022. So, it's just a guess on what happens next.
For investors who don't mind that it produces coal, this business may still do well on the total return measure because of the big dividends. Of the analyst opinions collated by Commsec, five rate it as a buy and only one rates it as a sell.
