Renewable energy generator Infinis Energy (LSE: INFI) currently offers a prospective dividend yield of 10%.
Conventional utilities such as SSE (LSE: SSE) Centrica (LSE: CNA) and National Grid (LSE: NG) (NYSE: NGG.US) only yield between 4.5% and 5.5%. Should I dump these lumbering giants from my portfolio and invest in Infinis?
Not so fast
A quick calculation tells me that the 18.7p cash dividend Infinis is forecast to pay this year would cost the firm 56m. Thats 30% more than the 43.3m Infinis is expected to report in post-tax profits.
It was a similar story last year, when Infinis paid 18.3p per share, or 55m, to shareholders, despite reporting earnings of just 6.9p per share.
In fairness, last years 55m dividend was almost covered by free cash flow, which totalled 53m. However, this was only because of a one-off 20m gain from the sale of the companys hydro-electric assets. Free cash flow from continuing operations was only about 33m.
A big IPO clue
Infinis floated on the London Stock Exchange in November 2013. Prior to this it was owned by Guy Hands well-known private equity firm, Terra Firma, which remains the controlling shareholder with a 70% stake.
Private equity firms are well-known for selling at the top. The firms shares have performed poorly since joining the stock market, falling by 30% from an initial price of 269p to todays price of 188p.
I suspect that the generous dividend is the result of pressure from Terra Firma, which will want to extract as much cash as possible from Infinis while it remains a controlling shareholder.
3 reasons not to buy
The firms 2014 results highlighted three factors that have discouraged me from investing in Infinis.
1. Oil prices
Infinis warned that the fall in oil prices has resulted in lower gas and wholesale power prices.
This has not been a big issue so far, but Infinis says that if oil prices remain at current levels for a number of years, this will have an adverse impact on the performance of the Company.
I believe oil prices are likely to remain low.
2. Terra Firm wants out
Secondly, Terra Firma has said it would like to sell its remaining 70% shareholding.
Such a large sale could well take place at a discount to the current market price, depressing the share price further.
3. Political risk
Infiniss profits are heavily dependent on government subsidies for renewable energy. These are likely to change over time, possibly unpredictably. This has already happened in the solar market, for example.
Ultimately, I think Infiniss dividend is too aggressive to be safe. The firm might manage to maintain this level of payout for some years, but it might not. Its not something Id be comfortable with in my income portfolio.
In contrast, Centricas recent 30% dividend cut was disappointing for shareholders but should now put the firm on a safe footing for future payouts, which will be based on post-tax operating cash flow.
Similarly, both SSE and National Grid have managed to maintain their policy dividend growth in-line with RPI inflation. Both have dividend cover of about 1.25, and remain attractive as income buys, in my view.
It’s also no coincidence that Infinis Energy was not the utility selected by the Motley Fool’s top analysts for their lifetime income portfolio, “5 Shares To Retire On“.
Instead, the Fool’s experts chose just one of the other utilities I’ve discussed in this article.
To find out the identities of the five companies chosen for this report, click here.
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Roland Head owns shares in SSE. The Motley Fool UK has recommended Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.