Barclays stays at 'overweight' on Drax

Barclays reiterated its 'overweight' recommendation on shares of Drax the day after the company announced its new dividend policy.

Its analysts said they could understand investors being slightly disappointed that the company had not provided more specific and formulaic guidance.

However, its increasingly low risk earnings mix, high cash generation, strong profit guidance and scope for high returns made the stock a compelling proposition for investors.

The broker anticipated Drax would be able to grow its ordinary dividend by 8.4% per annum until 2025, in-line with its average growth in operating profits (EBITDA).

On top of that, the analysts expected a further £75.0m-worth of divis in 2018 and £150.0m per year from 2019 onwards, with the latter most likely taking the form of special payouts.

It estimated that would make for a return of 9.3% in 2018 and more than 15% from 2019 onwards, even when allowing for new growth capex funding.

The comapny's ratio of net debt to EBITDA should also remain "comfortably" below its target ratio of 2.0 times net debt to EBITDA.

Barclays kept its target price at 420p.

"We forecast these two shareholder return streams (ordinary and special dividends) to total just under £2bn by the end of current biomass subsidies in 2027, or c.1.4x the company’s current market cap."