HYP Watch List: Drax (DRX)

Photo: J Brennan
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I continue to be on the lookout for good new dividend-paying shares for my High Yield Portfolio. These high-yield shares form Level 6 on the DIY Income Investor Income Pyramid).
Drax is a FTSE 350 company and has a 6.2% yield. It produces 7% of all UK electricity at its coal-powered generation station in Selby, North Yorkshire and is the biggest such power station in western Europe.

Citywire's Smart Investor has recently reviewed Drax.

The 'pros' may be summarised as:

• it produces 7% of UK electricity, at a time when generation capacity is running short
• unlike nuclear power stations, the generating load can be switched on and off quickly
• it is proven technology
• Drax plans to diversify into the burning of bio-mass (wood, etc.)
• p/e less than 10
• impressive free cash flow
• low gearing (13% debt to equity; interest coverage 12.8)
• return on equity 13% last year
• good yield (6.2%), with additional special dividends in recent years

The 'cons' are:

• Burning coal is hardly 'green' or 'sustainable' and may be increasingly subject to carbon taxes
• Income level depends on the price of oil and coal
• Gas-fired power stations are cheaper
• Single-site operation: any disruption would hit revenue significantly
• Proposed introduction of a 'carbon floor' to prices (due 2013) will hurt revenues
• Benefits of diversifying into biomass are uncertain
• The biomass initiative may require fund-raising from shareholders

The Smart Investor's verdict: "Drax is not perfect. Buying a slice of it comes with a fair amount of risk. However in terms of value, financial viability and performance it is attractive at current share price levels."

Maybe - but the lack of operational flexibility worries me: and I think that there are other more attractive opportunities in the energy sector.


I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.