The ASX coal share New Hope Corporation Limited (ASX: NHC) is about to go ex-dividend and then pay a very large dividend. Is it time to buy this business for passive income?
Energy prices jumped higher after the Russian invasion of Ukraine. This has helped increase New Hope's profit, which is then being translated into bigger dividends for shareholders.
It's not as though New Hope is paying out all of its profit as a dividend. The business is valued at such a cheap valuation that it represents a very high dividend yield.
How large is the dividend yield?
For the FY23 half-year result, New Hope's board decided to declare that the interim dividend would be 40 cents per share. That was an interim dividend of 30 cents per share and a special dividend of 10 cents per share. The total dividend of 40 cents per share was an increase of 33% year over year.
This dividend was funded by a 95% increase in the earnings per share (EPS) to 77.5 cents. This means the dividend payout ratio is only 51.6% of the profit.
In terms of the dividend yield, the 40 cents per share represents a grossed-up dividend yield of 9.5% because it's fully franked. Excluding the franking credits effect, the cash dividend yield is 6.7%.
The ex-dividend date is 17 April 2023, while the payment date is 3 May 2023. Investors still have a bit of time to grab shares, if they want to.
Is the New Hope share price a buy?
I think investors need to be careful about the idea of investing in a business for a dividend yield when there's a danger that the New Hope share price could fall and offset a lot, or all, of the dividend income received.
New Hope's share price has held onto most of the gains as energy prices remain high enough for the company to keep making a lot of profit. We just don't know how long energy prices are going to stay as high as they are.
According to Commsec, New Hope shares are only valued at less than 5 times FY23's estimated earnings with a potential grossed-up dividend yield of 23.8%, which is almost 24% in the space of just over half a year (with the payment of this dividend and the FY23 final dividend).
One of the tricky things is that coal is coming under increasing pressure in the Western world and a lot of investors don't want any exposure to coal miners. I don't think it'd seem so cheap without that ESG investing exclusion.
For me, while the dividend yield is high, I don't think it's worth buying today because the New Hope share price has already shot higher. I prefer to buy cyclical businesses when they're at a low point. I would also prefer to invest in a business that has a positive long-term growth outlook in terms of demand.
New Hope share price snapshot
The coal miner has gone up by around 3% since the start of the year.
