Shares in power-generation company Drax Group are -5% in mid-morning trading after the company reported significantly reduced earnings (EBITDA -15.7% YoY) and operating cash flow (-43% YoY). Two unplanned generation unit outages and £27m in coal asset write-offs are stated as the primary reason for much of the pre-tax earnings losses, while some of the blame for lower cash flows is being pinned on seasonality (lower summer demand).

Despite a significant reduction in operating cash flows, Drax Group announced an improved dividend pay-out (+14.3%, from 4.9p to 5.6 per share), in an effort, perhaps, to mollify disgruntled shareholders. This also comes hot on the heels of a £50m share buy-back programme that was unveiled with 2017 FY results in February (which, coincidentally, also reported a pre-tax loss).

With yet another disappointing earnings report today, have the investors finally had enough? A combination of poor results and new capital allocation plans seem to go hand in hand for Drax Group lately. And while utility companies typically boast healthy dividend yields (Centrica 8.74%, United Utilities 5.55%, Severn Trent 4.69%), is Drax Group (4.55% dividend yield) perhaps struggling to keep up with larger industry peers in maintaining superior return on shareholder equity?

While the seasonal slow-down factor may pass, how much longer can Drax Group afford to shower shareholders with capital returns amidst disappointing corporate results?

Artjom Hatsaturjants, Research Analyst, 24 July 2018