There are two petrol stations side by side. A litre of fuel at one costs £1.46 and at the other £1.20p. You are going to fill up at the cheaper one. Everyone else is going to fill up there as well. It won’t be long until the queue for that station extends half way up the street.
At that point some drivers will decide that avoiding sitting in a queue for god know how long is worth paying an extra 26p per litre for. They might not have to pay that much more, as the dearer station might have already begun lowering its prices after seeing nothing but empty crisp packets fluttering about its desolate forecourt. Or perhaps the cheaper station has started inching its prices higher, hoping to get as much from the drivers in the mammoth queue but deterring drivers from joining it. Perhaps, the cheaper station is winding up and wants to dump its stock as quickly as possible, and the cars at the back of the queue are in for a nasty shock.
The point is that a genuinely great deal is usually pounced on. Something will change to make it not so great. However, The 18.8% forward dividend yield on Amedeo Air Four Plus (LSE: AA4) shares remains stubbornly high. I would normally expect investors to pile into this stock, drive its price up, and bring that dividend yield down. So, why is that not happening?
Investors don’t know about the high dividend yield
Amedeo has a small market cap of £129m. It’s a small cap stock. Although its trades in the London Stock Exchange’s Main Market they are listed on the Specialist Fund Segment. It’s not a member of any well known index. Only one broker covers the stock. It’s not a household name. Although, it has a small float and its relatively illiquid, and its share price should be susceptible to wide price swings on limited volume, perhaps there is simply not enough awareness.
But, there are freely available tools to screen stocks, and people do use them. I assume that UK investors are on the look out for high dividend yield’s, and Amedeo’s should stand out. Since everyone seems to claim they are value investors, Amedeo’s forward Price-to-earnings (P/E) ratio 7.7 should also pop out.
The don’t like the Amedeo Air Four Plus share flight plan
At its heart this is an aircraft leasing company. But, although Amedeo share trade like any others on the LSE, it is structured as a fund. It has an investment objective and investment policy. It appointed, or rather created, an asset manager—Amedeo Limited—to look after the aircraft leases. It has an administration and oversight company, called Amedeo Services.
I think people are familiar with investment trusts that own portfolios of shares. Some deal in foreign or unlisted stocks, which are harder for UK retail investors to get exposure in. Some of these, like Scottish Mortgage, are incredibly popular. But then there are the trusts and funds that invest in infrastructure, renewable energy projects, and also aircraft leasing. These might be less appealing, to investors who might well ask, why not structure as a regular company.
Amedeo is not committed to operating in perpetuity if possible. Come 2029 there will be a liquidation proposal meeting. Shareholders will vote on whether the fund should be wound up. Perhaps, that is off-putting for investors with longer time horizons.
Then there are the compulsory redemptions, which are like share buybacks, except that investors have to sell their shares back to the company. All of Amedeo’s ordinary shares were stipulated at issue to be redeemable. But I cannot find a call price. That would be the price at which all shares can be bought back by the company at will. The redemptions that have occurred did so at different prices, so that suggests a call price does not exist. Now call options benefit the issuer, which is Amedeo, and would lead to a discount being applied to the price of the stock. That might explain why that dividend yield is so high. And then we have the uncertainty about shares being called away at any time, at seemingly any price, which might not be convenient by an investor.
Uncertain passive income
The single broker covering Amedeo has pencilled in dividends of 6.86p and 8.00p per share in 2023 and 2024. The 2024 forecast is where the +18% yield is coming from. The broker also has a price target of 57p, which is 33% above the current Amedeo share price of 42.70p. They would have been aware that the dividend yield will still clock in at 14% even if the target is hit.
Remember the petrol prices. The choice was between two identical litres of petrol, but one was cheaper than the other. An easy choice. But the same is not true when considering buying one stock versus another. One dividend can be “safer” than another. The stock with the safer dividend will probably trade at a price that means the yield is lower.
On a risk adjusted basis, Amedeo might be where it should be. Investors are not keen to buy at higher and higher prices, forcing the forecasted dividend yield lower and lower, because they believe its high, because it needs to be, to compensate shareholders for the risk that they might not get paid what they were expecting.
I have written more on why this might be the case. But, in summary, some of Amedeo’s aircraft are leased to Thai Airways. Thai Airways has been in bankruptcy protection since 2020. It has failed to make lease payments during the pandemic, and the lease was restricted temporarily to a pay as you fly deal. Now it’s back to fixed payments. But, if Thai Airways stops paying it puts the dividend in some jeopardy.
DISCLAIMER: James J. McCombie owns shares in Scottish Mortgage Investment Trust. The Storied Investor has no beneficial ownership position in any of the shares mentioned.
The Storied Investor 