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The UK market is known for its high-yielding income stocks, but the company I'm looking at today is different, too.
The business has a market cap of £500m and operates in the energy sector. Its shares currently boast a predictable dividend yield of 17%. The administration has recently reiterated its support for this payment and my calculations suggest it can be sustained.
I just bought these shares. I hope that when the dust settles after the Autumn Budget on 30 October, investor confidence in this business may improve.
Cash withdrawal
Serica Energy (LSE: SQZ) is one of the top 10 oil and gas producers in the UK North Sea. The company has grown rapidly in recent years by purchasing mature fields from large operators such as BP.
This growth was then extended by the acquisition of rival North Sea company Tailwind Energy in 2023.
Serica's focus on producing assets means it has no exposure to oil and gas exploration. Instead, the company's costs are carefully directed to maximize production from known reserves.
As a result, the group's business generates a large surplus. Much of this has been returned to shareholders over the past few years, as this chart shows.
Chart with TradingView
The retailer's latest forecasts suggest Serica's shares will remain at 23p per share this year. It paid a dividend of 17.4%.
Why are Serica shares so cheap?
This high yield is a reflection of the stock's low valuation. Serica shares are currently trading at three times forecast earnings for 2024, according to the latest consumer estimates.
Shares have fallen 40% so far this year as investors fear changes in the UK's tax and energy policies.
Another concern is that potential changes in the Autumn Budget could make it difficult to operate profitably in the North Sea.
Another risk flagged by Serica's new CEO is related to cash grants. In short, changes to these rules could reduce companies' ability to claim tax relief on future spending. This will make it less attractive to invest in North Sea assets.
Another big risk I see is that Serica's current production rate will not be sustainable forever. Many of these sectors are mature. Production will gradually decline without investment in further development and acquisition of new assets.
Budget uncertainty means planning is difficult right now. There is a possibility that Serica may simply use its existing assets and introduce managed depreciation. In that case, the 17% dividend yield may be compensated by the gradual decline in the share price.
Why have I been shopping
I won't lie. Serica Energy is probably one of the riskier stocks I currently own.
However, I am comfortable with the position as part of a diversified portfolio. Here is the reason.
In my experience, markets hate uncertainty and fear change. But what I have found is that often, when new rules are made, good companies are able to adapt and stay profitable.
I think that's what's going to happen here. I'm always tight ahead of the budget. I hope that Serica shares will recover when there is more clarity about future investment decisions.
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