S&P/ASX 200 Index (ASX: XJO) energy shares have had an extraordinary 12 months. A lift in energy prices saw many of the players involved achieve strong net profits after tax (NPAT) and cash flows. One of the biggest winners was coal miner New Hope Corporation Limited (ASX: NHC).
The New Hope share price has gone up 170% over the past year — an enormous gain. Despite the large increase, the dividend yield is still predicted to be 21%, excluding franking credits, in FY24, or 30% grossed-up. That's according to the Commsec dividend estimate of $1.30 per share.
In fact, the FY23 dividend yield is expected to be even bigger. With a possible annual dividend of $1.73 per share, the 2023 cash yield could be 28%, with a potential grossed-up dividend yield of 40% from the ASX 200 energy share.
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Why is the ASX 200 energy share such a dividend powerhouse?
New Hope pointed out at its AGM that at the start of FY22, the coal price was at around US$150 per tonne, up from US$48 per tonne seen during the height of uncertainty in 2020.
The New Hope chair Robert Millner said:
These low prices were quickly forgotten as demand rebounded and the supply of high-quality thermal coal remained constrained. The Russian invasion of Ukraine then caused a further supply shock to our market increasing concerns about energy security in many nations.
Newcastle index prices reached a record of more than US$400 per tonne for the fourth quarter of the financial year. They have since declined from the record levels achieved, but still sit well into the US$300 per tonne. Record coal prices undoubtedly benefited the company's financial performance, but the positive result would not have been achieved without the commitment of our teams to disciplined operational and cost management.
Revenue from a higher coal price largely adds to profit for the business because mining costs don't move in unison with the coal price. The significantly higher coal price is a huge boon for profitability.
The dividend yield is exceptionally high because of the extremely low earnings multiple that it's valued at.
According to Commsec, the New Hope share price is valued at around 3.5 times FY24's estimated earnings and 2.7 times FY23's estimated earnings.
Can boom times continue?
New Hope said that it expects "coal prices will remain well above historical averages, as uncertainty remains about security of global energy supply" with an imbalance between supply and demand. There is also no firm indication of the length of time it will take the world to transition to a decarbonised energy market.
Indeed, China may also start buying significant quantities of coal again.
Time will tell how long the ASX 200 energy share is able to generate outsized net profit. Earnings are expected to shrink by FY25, according to Commsec projections, with possible earnings per share (EPS) of $1.23 and a dividend per share of 63 cents per share.
Even with those much-reduced numbers, it would still be priced at five times FY25's estimated earnings with a possible FY25 grossed-up dividend yield of 14.6%.
However, being a coal miner, there are questions relating to ESG investing that investors will need to consider if interested in the business.
