Analysts are currently eyeing a handful of beaten-down names with serious recovery potential. Three in particular are forecast to grow more than 60% over the next 12 months, each with low forward price-to-earnings (P/E) ratios of between five and six times.

I decided to weigh up whether the forecasts are accurate or if analysts are being overly optimistic.

Future

With shares down 29% to 660p, publishing company Future (LSE: FUTR) has had a tough year, hit with declining ad revenues amid a tougher digital landscape.

Yet analysts remain optimistic. The average 12-month forecast sits at 1,324p – implying a potential gain of 100%. Of the seven analysts covering the stock, six rate it a Strong Buy, highlighting confidence in its diversified portfolio and strong cash generation. Its dividend’s minimal but the balance sheet’s healthy with debt well covered.

Future’s risk lies in its reliance on online traffic and advertising demand. If the broader digital ad market continues to slow, revenue growth could remain under pressure.

But with management focused on operational efficiency and subscription-based income, I think the stock looks interesting for investors to consider as a recovery play in 2025 and beyond.

Diversified Energy Company

Diversified Energy Company (LSE: DEC) is a natural gas and crude oil producer with assets spread across the Appalachian Basin in the US. Its shares have slumped 24.4% this year to 1,020p, but analysts expect a rebound to 1,713p — a forecast rise of 68%. Ten analysts track the stock, with eight calling it a Strong Buy.

Revenue is up a solid 56.2% year on year, and the dividend yield stands at a lofty 8.76%, comfortably covered by cash flow.

However, this isn’t a risk-free option. DEC recently reported a £106m loss and its return on equity (ROE) is currently -22.3%. That means profits haven’t followed revenue higher, raising concerns about cost control and debt servicing. Commodity price volatility and regulatory changes in the US energy sector could also weigh on future results.

Still, for investors seeking income and willing to stomach some risk, DEC might be worth keeping an eye on.

RHI Magnesita

Finally, RHI Magnesita is an Austrian materials firm supplying refractory products and services to industries such as steel, cement and glass. It has seen its share price fall 38% to 2,110p this year. 

Analysts expect a rebound to 3,500p, suggesting a 65.7% increase. Seven analysts follow the stock, with four giving it a Strong Buy rating. Despite revenue and earnings dropping 5.7% and 75% respectively year on year, the company’s 7.43% dividend yield remains well supported by cash flows.

Risks here include cyclical exposure to the steel and construction sectors, both of which are sensitive to global demand swings. I think its recovery potential is only moderate but for income investors, the yield‘s still worth considering.

Final thoughts

Overall, these three FTSE 250 stocks have been battered, but market forecasts suggest optimism regarding a recovery.

While I believe each has potential, in my opinion, Future deserves the strongest consideration. As always, investors should weigh the risks as carefully as the rewards.

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But whether that happens depends on a number of factors. One, of course, is how much they put into the SIPP. But another important factor is how they invest those funds.

Here are a couple of things I think can help improve the prospects of successfully building wealth in a SIPP – and one potential pitfall.

Starting as soon as possible

Pensions can seem far off for many people.

But retirement gets closer over time and that time can be very powerful if it is used to help build the value of the SIPP.

By taking a long-term view of investing and starting sooner rather than later, an investor can expand the opportunity they have not only to contribute to it but also to benefit from long-term compounding.

It can be tempting to put this off. But I think it makes sense to get started immediately, even if one only has a little bit of spare money to invest.

Treating risk seriously

Dreaming of a comfortable retirement is understandable. But while investing in the stock market can offer potential rewards, it also brings risks.

People know that but often they can suffer by underestimating some risks when choosing what shares to buy.

It makes sense to take risk management seriously. For example, easy steps in that direction can include sticking to what you know when investing and always keeping a SIPP diversified across a range of different shares.

Dividends can be attractive – but context is needed

One mistake some people make when investing a SIPP is thinking that if they buy some of the highest-yielding shares they can find and let the dividends pile up over the years, they will be able to build wealth.

Sometimes it works that way, so why do I see this as a potential mistake?

Dividends are never guaranteed and can be cut at any time. Meanwhile, dividends are only one part of what drives a share’s total return. It is also important to consider movements in share price.

As an example, consider Diversified Energy (LSE: DEC).

At first glance, its 8.2% dividend yield may sound highly attractive.

The dividend per share actually used to be higher than it is now, but even after a steep cut, that yield is still unusually high among UK shares.

But while the dividends have been chunky, what about the share price? Over the past five years, the Diversified Energy share price has fallen 57%.

That is not necessarily because of prices in the gas industry in which Diversified operates. British Gas owner Centrica has seen its share price more than quadruple in the same period.

The issue, as I see it, is the business model at Diversified. Its novel approach of buying up tends of thousands of aging gas wells has let it scoop up assets at potentially low prices.

But heavy borrowing has hurt the financial attractiveness of such an approach.

Dividends can help grow a SIPP’s value – but share price movements matter too!

The post 2 smart moves and 1 mistake when investing a SIPP appeared first on The Twelfth Magpie.

Out of curiosity, I decided to take a closer look at the group’s numbers. But I soon got confused by the various adjustments made when reporting its results.

Don’t get me wrong, it’s not alone in presenting its financial information in this way. Numerous companies make reference to various ‘adjusted’, ‘basic’, ‘core’, and ‘underlying’ financial measures.

And all of these businesses are trying to be more open and transparent by removing one-off items that aren’t expected to reoccur or reverse the impact of more obscure accounting adjustments.

But perversely, sometimes the position becomes more confused.

Trying to see the wood for the trees

For example, prior to investing, I reckon most would probably want to know whether Diversified Energy was profitable in 2024.

Unfortunately, it made a loss of $87m. Not good.

But hang on, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) was $472m. Much better.

Then again, its pro-forma (like-for-like) adjusted EBITDA was $549m. That’s only half of its current (12 May) market cap.

However, the use of EBITDA is controversial. Warren Buffett once said: “Does management think the tooth fairy pays for capital expenditures?”

Indeed, the group itself is cautious. It says adjusted EBITDA should “not be considered in isolation” or be used as a substitute for other measures. But it says it’s “useful to investors” because it’s widely used in the industry and removes potentially volatile items.

What else could we look at to assess the company?

Cash is king

Well, it’s often said that cash doesn’t lie. After all, it either exists or it doesn’t.

In 2024, the group reported free cash flow (FCF) of $170m.

But its adjusted FCF (including the proceeds from land sales) was $211m. Encouragingly, it’s similar to previous years – $247m (2023) and $220m (2022). And importantly for income investors, it’s comfortably more than the $70m that the 2025 dividend’s likely to cost.

My verdict

I’m not picking on Diversified Energy. In fact, I like the group’s business model, which can be summarised in five words – acquire, optimise, produce, transport, and retire.

It buys fields that are coming to the end of their lives. It then invests to improve their operational performance and prolong their production window. Most of the gas is sold and delivered to industrial and commercial customers at pre-agreed prices.

For 2025, recently completed acquisitions are expected to lift adjusted EBITDA to $825m-$875m and generate FCF of $420m.

However, its borrowings are high. At December 2024, its net debt was three times pro-forma adjusted EBITDA, comfortably above its target of 2.5.

Also, some have said the company is under-estimating the cost of retiring its wells.

But the demand for natural gas continues to rise and President Trump wants the industry to produce more. This should help the group’s medium-term earnings.

And then there’s the dividend. In March 2024, when it was cut by two-thirds to $0.29 a quarter, the company said: “This fixed quarterly dividend payment will be sustainable for at least three years.” On this basis, the stock’s currently yielding an impressive 8.8%.

These could be reasons for investors to consider adding Diversified Energy Company to their long-term portfolios.

The post Help! What am I to make of this FTSE 250 income stock? appeared first on The Twelfth Magpie.

For many of us, retirement may still seem a long way off. But it is getting closer every day – and taking a long-term approach to the necessary financial planning can help reap significant benefits.

Some moves can destroy rather than create value in a SIPP, however. Here are three such pitfalls investors should beware of.

1. Little costs can soon add up

Account management fees, commissions, transfer fees, paper statement fees… the costs and charge of a SIPP can soon add up.

That is even before considering the opportunity costs of some choices. For example, one provider may offer lower interest on cash balances than another.

In isolation, any one of these things may seem minor. But bear in mind that a SIPP can stretch for decades before its owner even retires – and can go on for decades afterwards.

This is very much a long-term investing project. Over time, even small seeming fees and costs can eat heavily into returns.

So choosing the right SIPP provider is a simple but important move for an investor to make.

2. Not paying ongoing attention

Another way people lose money — even when making good investments — is paying insufficient attention to how their portfolio is performing.

As an investor not a speculator, I am not generally a fan of regular trading.

But that does not mean that, having bought a share, one ought simply to tuck it away in the SIPP and forget about it.

An investment case can change for a host of reasons, from geopolitical risks to technological advances.

No matter how good an investment may seem when making it, it makes sense to keep an eye on it from time to time and consider whether anything fundamental has changed that may mean it no longer deserves a place in one’s SIPP (or, conversely, deserves a bigger place than before).

3. Paying too much attention to dividends

Another mistake SIPP investors can make is paying too much attention to dividends.

Dividends are great — but are never guaranteed to last. They also have to be weighed against capital gain or loss.

That helps explain why I do not own shares in gas well operator Diversified Energy (LSE: DEC).

Its 10.3% dividend yield is certainly attention-grabbing. Incredibly (but tellingly), that is actually modest in relation to some of its historic yields!

But guess what?

Over five years, the Diversified Energy share price has collapsed by 64%. So, an investor who had bought it for their SIPP in March 2020 would now be sitting on a large pile of dividends – but also a shareholding worth far less than they paid for it.

Diversified’s business model has risks. Buying up lots of old wells from other companies has bloated the borrowing on its balance sheet. It also brings the risk that large cleanup costs as wells end their productive life could eat into profits.

The business model is innovative and has produced lots of juicy dividends for shareholders, even though we have seen the company reduce its payout.

But dividends are always only one part of the story. A savvy SIPP investor focusses on total return from any shareholding.

The post 3 simple ways SIPP investors fail to maximise their pensions appeared first on The Twelfth Magpie.

But how can an investor boost the value of a SIPP?

Here are three ways.

1.    Putting more money in, now

Retirement can seem far off for many people, but it creeps up fast.

The earlier someone puts money into their SIPP, the longer the timeframe on which they can make it work for them. As a believer in long-term investing, I think that can be a simple but powerful way to grow the value of a SIPP in future.

More money invested now will hopefully mean bigger rewards in future.

2.    Paying close attention to charges, fees, and commissions

Sometimes SIPP providers have what seem like a very attractive cost structure – but that can change over time.

If an investor is too busy, working and living life, they may not notice that fees and other costs are adding up.

While it may seem like a small number, 1% or 2% per year over the course of decades can eat into the value of a SIPP dramatically by the time it comes to drawing it down for retirement!

So I think it always makes sense for an investor to consider their choice of SIPP provider (and the specific SIPP structure) carefully and review that choice from time to time. After all, it is possible to transfer a SIPP just like it is possible to transfer an ISA.

3.    Buying the right shares

The two moves above are measurable and fairly obvious.

My third one, by contrast, involves some judgement. It is easy to say that a SIPP investor ought to buy the right shares – but what does that really mean in practice?

One thing I think some investors get wrong when it comes to pensions is paying too much attention to what is going on now and not enough to what may happen between now and when they draw their pension, potentially many decades from now.

So, for example, the 7.1% yield offered by Diversified Energy (LSE: DEC) certainly grabs my attention. If I could earn that sort of yield then compound it in my SIPP for two or three decades, I could potentially increase my pension’s value significantly. (£10,000 compounded at 7.1% annually for 30 years would grow to £78,286).

But the question is, could I earn that sort of yield for decades?

Diversified has come up with an innovative approach to the gas business, buying up tens of thousands of old wells that still have some resources left in them. It has a vast estate of gas wells.

But such an approach also brings risks.

One is servicing the substantial debt pile the company has incurred along the way. Another is the potential costs for cleaning up those old wells once they reach the end of their productive lives.

The Diversified yield still looks juicy, but the dividend has already been cut in the past several years and the long-term share price chart does not fill me with optimism, either.

That helps explain why I do not own Diversified shares in my SIPP and have no plans to buy them. Potential rewards matter – but so too do risks.

The post 3 ways to make a SIPP get bigger, quicker appeared first on The Twelfth Magpie.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

With lots of potential to invest my ISA in 2025 and beyond, here are three mistakes I will be seeking to avoid.

Mistake 1: ignoring seemingly small costs

What is the difference between 1% and 1.5%? At face value, it may seem like there is little to chose. But an ISA is a long-term investment vehicle – and over the long term, seemingly small differences can add up.

For example, imagine £20k gets chipped away by 1% a year. After 20 years, it will be £16,358.

What if it gets chipped away by 1.5% each year for the same period? I will end up with £14,783. That strikes me as a big difference.

Before even considering how to invest my ISA then, I look at what options may be suitable for me and what charges each will impose.

There are lots of choices available so I want to make the choice that best suits my own financial circumstances and objectives.

Mistake 2: going ‘all in’ on one big idea

Still, even if the charges are higher, maybe I could still make bucketloads of cash if I choose the right shares?

Yes, I could. Putting a £20k ISA into Nvidia stock five years ago, for example, would mean I was now sitting on shares worth over half a million pounds (£547,000, in fact).

But such runaway successes are the exception not the rule – and even the best company can run into unforeseen difficulties.

So wise investors always spread their ISA over a range of shares.

Mistake 3: failing to spot a potential value trap

Another mistake is buying a share with an unusually high dividend yield, only to see it cut.

For example, Diversified Energy Company (LSE: DEC) and its 7% yield may look appealing. A few months ago though, that yield was actually quite a bit higher.

The company that specialises in buying up old gas wells has slashed its dividend. Not only that, the share price has tumbled 48% in five years.

That does not surprise me. High-yield shares that cut their dividend often see a share price fall as a result.

Diversified has some things going for it. It owns tens of thousands of wells. Thanks to its secondhand purchasing habits, it does not need to spend on exploration like many oil and gas majors do.

But it has borrowed heavily as it has grown, while facing risks from the cleanup costs of old wells to volatile energy prices.

I do not own this share partly because I fear such risks mean even the current dividend, though smaller than it was formerly, could be cut again.

If I had bought Diversified for my ISA before its dividend cut, I may now think I had fallen into a classic trap. That is one mistake I am always keen to avoid!

The post 3 ISA mistakes to avoid in 2025! appeared first on The Twelfth Magpie.

The movement in the share price over the past five years might explain this pessimism. Compared to September 2019, it’s fallen 63%. And it’s down 25% since the start of 2024.

Personally, I like DEC’s business model.

It buys existing gas fields in the US and seeks to improve their operational performance and useful economic lives. It’s argued that exploiting existing sites rather than drilling for new ones is better for the environment.

Drilling into the detail

However, it’s a very complicated business to understand.

It regularly buys and sells fields, enters into long-term hedging arrangements, has a complicated debt structure and carries a provision in its balance sheet for the cost of retiring wells. This can make its financial performance difficult to analyse.

For example, one of its preferred measures is net debt-to-pro-forma trailing 12 months adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). Get your head around that!

But cash doesn’t lie.

In 2023, the company generated $410m from its operations. And during the six months ended 30 June 2024, it made $161m.

However, the company’s appetite for buying more wells and its need to repay its significant debt pile means a lot of this is given to third parties.

Politically unpopular

Concerns have been expressed that DEC is underestimating the cost of closing its wells.

In December 2023, four members of the US House of Representatives Committee on Energy and Commerce published a letter claiming that agreements with certain states allow the company to defer up to $2bn of environmental liabilities. Although lawful, the authors claim this enables DEC to give “the appearance of profitability on paper“.

The company refutes the assertion. In its defence it says that the allegations originate from an old story that was previously proven to be inaccurate. It also points to the awards that it’s won for its reporting transparency. And to the fact that the group’s auditors have never raised the topic. 

Encouraging valuation metrics

Despite these issues — which could explain why the stock’s so popular with short sellers — I think it remains one of the best income shares around.

It currently pays a ‘fixed’ dividend of $1.16 (88.2p) a year, which at a current (4 October) share price of 898p, implies an impressive yield of 10.2%. But as a reminder that dividends are never guaranteed, its payout was cut by two-thirds in 2023.

Interestingly, the company’s market cap of £440m is now not far off its book value as of 30 June 2024 of $548m (£416m). On the face of it, the shares appear to offer good value.

For these reasons, I remain a fan of the company — it’s been on my watchlist for a while.

But I don’t want to invest.

That’s because of the apparent long-term decline in its share price. Irrespective of what I think, if others have concerns about the company, its stock will continue to fall. And in these circumstances — even with such a generous dividend on offer — I don’t want to part with my hard-earned cash.

The post Is it time for me to buy the FTSE’s most shorted share? appeared first on The Twelfth Magpie.

Recent problems

Over the past year, the natural gas benchmark price is down 23%. Given that the firm is in the business of acquiring, optimizing, and managing existing natural gas and oil assets, this doesn’t help. If we’re looking at just the past few weeks, the fall in the share price also matches up very well with the 13% fall in the price of crude oil.

As with any energy stock, there will always be a strong influence driving it via the price of the underlying commodity. The reason for this is that the price of the end product impacts the revenue (and ultimately the profit) of the business. The Diversified Energy Company could deliver exactly the same amount of natural gas and oil as a year ago, but if the price of the commodity is down, revenue is going to fall.

Another problem was noted in the half-year results. At first glance, shareholders would probably be quite spooked to see that operating profit dropped 99% versus the same period last year. This meant the company posted net income of $15.7m in comparison to $630.9m in the year prior.

On closer inspection, this was actually due to “fair value adjustments of unsettled derivative financial instruments”. So this isn’t a cash loss, but it’s true that the large swings in accounting details would likely have put off some potential investors.

The direction of travel from here

I recently wrote about the fall in BP shares, noting the impact that the lower oil price was having. One reason why I’m holding off buying (even though I like the stock) is because I think oil and gas prices have further to fall in coming months.

Demand out of China for these commodities is still low and I don’t see this changing soon. Further, I’m hopeful of a ceasefire in the Middle East. If seen, this would likely cause the oil price to fall further. When I tag on other reasons, I just can’t make a compelling argument to make oil and gas prices finish the year higher than currently.

As a result, it doesn’t make sense for me to buy Diversified Energy Company shares now. Further, even when I decide the time is right to buy an oil and gas stock, I’d much prefer to buy a larger, more established company, such as BP.

Sitting this one out

I don’t believe that the firm is in any material difficulty right now. It’s still profitable and is pushing ahead with some interesting projects, such as the one in East Texas. The potential to grow is definitely there, and it has a good track record.

However, I think the move over the past month shows how sensitive the stock can be to changes in commodity prices. For that reason, I’m staying clear right now.

The post Down 20% in a month, I think it could be game over for this FTSE 250 stock appeared first on The Twelfth Magpie.

Yet a cut is a cut – and can be painful when it comes to the passive income streams one earns from a portfolio.

That explains why I diversify my portfolio across a range of different shares. But as an investor, it is also important to understand some of the possible signs that a dividend cut might be coming.

Unusually high yield

Have a look at this chart. Do we notice anything unusual?

Created using TradingView

It shows a dividend yield that stood at around 12% three years ago. But that then increased to almost 20%. In other words, for every pound I invested in this share, I would have got back 20p per year – if the dividend was maintained at that level.

Some shares have high yields and maintain or increase their payouts. But an unusually high yield – and 20% is definitely that for a FTSE 250 share – is a red flag for me. I would want to know why the yield was so high and judge what the future looked like for the dividend.

Sometimes a yield is high because a business had a particularly good year.

In other cases, it reflects the share price moving down as investor nervousness grows about the sustainability of a dividend.

That is exactly the case here. The yield chart above relates to Diversified Energy (LSE: DEC). The FTSE 250 share has fallen 62% in five years.

Growing debt

Diversified Energy announced a dividend cut in March, which did not surprise me at all. Partly that lack of surprise was because of the company’s balance sheet – something else I pay close attention to as an investor.

At $1.3bn, it had slightly less net debt at the end of last year than 12 months before.

Created using TradingView

Still, for a company that has a market capitalisation of around £440m (roughly $527m) at the moment, that is an uncomfortably high debt in my opinion.

Debt matters when it comes to dividends because the higher a company’s debt, the less financial flexibility a company typically has. Even if it generates large cash flows, it may need to use them to service debt, not to pay big dividends.

That is true of a FTSE 100 firm too — but a FTSE 250 company can find accessing finance more costly than a far larger company in the main index.

Looking for great companies not just high dividends

There are a host of other indicators I look at when considering what might happen to a share’s dividends in future. These are only two of them.

In short, instead of focusing on yield, I ask myself what a company’s long-term commercial prospects look like and what that might mean for shareholder payouts.

The post FTSE 250 dividend cut? A couple of warning signs I’d watch! appeared first on The Twelfth Magpie.

However, investing a £20k ISA can be a bit daunting. And if executed poorly, it can actually end up doing more harm than good. After all, investing in stocks isn’t risk-free. So let’s explore what to be on the lookout for and how to start earning an extra £1,200 right now.

The risks surrounding dividends

When a company reaches maturity, growth tends to eventually slow. There are only so many projects a company can invest in, and not all can deliver blockbuster returns. For example, a new product that generates an extra £5m in sales each year could be tremendous news for a small-cap. But for a multi-billion pound industry titan, it’s fairly meaningless.

As such, large businesses often choose to return the money they can’t find a good use for back to shareholders through dividends. And capitalising on these payout policies is how investors can earn a second income in the stock market.

However, this is where risk enters the picture. Even if a company pays a high dividend right now, there’s no guarantee it will continue to do so. Why? Because dividends are ultimately funded by money that a business doesn’t need. And when times are tough, these funds can quickly end up in short supply.

That’s why so many income stocks had to hit pause on dividends during the pandemic. And a portfolio of companies with weak balance sheets and lacklustre outlooks isn’t likely to generate a sustainable passive income.

Earning £1,200

On average, the FTSE 100 has typically offered a dividend yield of around 4%. Right now, the payout is closer to 3.6%, due to the rally we’ve enjoyed since the start of 2024. However, even with this recent boost, there are still plenty of companies offering considerably more.

There are currently 19 groups supplying a yield of at least 5%. And expanding the sandbox to include the FTSE 250 increases this to 70 companies. By snapping up the right blend, building an income portfolio that yields 6% would instantly generate a £ 1,200 second income when starting with a £20k ISA.

Sadly, not all of these enterprises are going to be sound investments. Take Diversified Energy Company (LSE:DEC) as an example. Until recently, the oil & gas producer offered one of the highest yields on the London Stock Exchange, at 16.3%. Yet, investors who were lured in by the promise of gargantuan income are likely kicking themselves today as the firm has since announced a dividend cut.

With the largest portfolio of oil & gas wells in the US, Diversified’s a major player within the energy sector. But, environmental questions arising about how it’s able to properly manage all 90,000 wells, paired with falling gas prices, has started creating cracks in the balance sheet.

All of this is to say that when exploring high-yield income stocks, investors need to pay careful attention to the underlying business. Not just from a financial perspective, but an operational one as well.

The post How I’d try and turn a £20k ISA into a second income worth £1,200 right now! appeared first on The Twelfth Magpie.