Drax Group Plc (LON:DRX) (LSE:DRX.L) has released results for the year to 31 December to the stock market. Its EBITDA is in line with guidance at £140 million versus £169 million from the prior year. This fall was driven by challenging commodity markets and a loss of LECs. It was mitigated by growth in system support and improving retail and pellet supply profitability.
Investors in Drax may be encouraged by its conversion of 3 biomass units, with 65% of generation from biomass in 2016. The investment was completed on budget. Investing in Opus Energy via acquisition could help the company to further deliver a diversified earnings base and will help it to move forward with its strategy.
Drax’s net debt declined from £187 million in 2015 to £93 million in 2016. Cash flow was also stronger than in the prior year, while its statutory PBT included unrealised gains related to forex hedging. When these forex gains are excluded, its underlying earnings dropped from £46 million to £21 million. However, the company’s overall strategy is being put in place and according to today’s investor update, Drax expects significant earnings growth and higher quality, diversified earnings in future.
This could support future dividend growth and turn Drax into a relatively appealing dividend stock. In FY2018 it is forecast to yield 4.4%, which is roughly in line with popular income shares stocks such as Vodafone Group plc (LON:VOD) (LSE:VOD.L), National Grid plc (LON:NG) (LSE:NG.L), Aviva plc (LON:AV) (LSE:AV.L) and Centrica PLC (LON:CNA) (LSE:CNA.L). National Grid yields 4.8%, Centrica’s shares have a yield of 5.4%, Vodafone’s shares yield 6.2% and Aviva yields 5.2%.
In my view, Drax could become a sound dividend share over the medium term. Its investment in biomass seems to be logical in my opinion as the UK moves to a low carbon future. However, given its falling profitability and currently low dividend yield, I think there are better income options elsewhere. The likes of Vodafone, National Grid, Aviva and Centrica all have higher dividend yields and are my preferred investment options in the income space.