When it comes to ASX dividend shares, there are few choices that can match WAM Capital Limited (ASX: WAM) right now for raw income potential.

WAM Capital isn’t an ordinary ASX dividend share though. It’s a listed investment company (LIC) that invests in mostly undervalued, mid-cap ASX shares with what WAM Capital calls a potential ‘catalyst’.  Once this catalyst has been realised by the market, WAM is normally inclined to sell the company. This strategy has worked very well for the LIC in the past. Since its inception in 1999, WAM Capital has returned an average of 15.7% per annum to its investors (before fees). A major part of these returns have come from the dividends WAM Capital has managed to dish out.

Since the global financial crisis in 2008, this LIC has managed to hold or increase its dividends every single year. On current prices, these are worth a 7.71% yield – or 11% grossed-up with full franking.

Can WAM Capital afford its 11% yield?

That’s hopefully the first question that comes to mind when you see a yield like 11%. Normally, this would indicate that the market views this yield as unsustainable and therefore a dividend trap. But listed investment companies are often treated a little differently by the market, so let’s probe a bit farther.

As at 30 April, WAM Capital’s major holdings include TPG Telecom Ltd (ASX: TPM), Cleanaway Waste Management Ltd (ASX: CWY) and Aristocrat Leisure Limited (ASX: ALL). It also had a cash weighting of 24.6% – which indicates a bearish outlook for ASX 200 shares in my view.

On a per share basis, this LIC’s net tangible asset’s (NTA) came to $1.47 – which is a long way from the current share price of $2.01.

So in other words, this yield is now looking even more impressive considering the share is trading for a 37% premium to its underlying value. If WAM Capital shares were trading at their NTA value, the dividend yield would be 10.54% or 15.06% grossed-up.

But here’s the kicker, WAM Capital’s last interim dividend came in at 7.75 cents per share. As of April, the LIC only had 6.1 cents per share left in its profit reserves. This tells us that WAM Capital is running out of gas in the tank. Unless things turn around soon (and it will have to be very soon), it doesn’t look like this company will be able to afford to continue paying its generous dividends at their current levels.

As such, I think there is a lot of risk in buying WAM Capital shares today for dividend income. Particularly since the share price is trading 37% above its underlying value, as this would effectively mean buying 63 cents worth of value for $1.

Thus, it’s a ‘no-deal’ from me.

More reading

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Worley Ltd (ASX: WOR) share price is down by 4.41% today and sits at $10.19 per share at the time of writing. Worley (formerly Worley Parsons) is a global provider of engineering services to the energy, resources and chemical sectors. 

Why is the Worley share price under pressure?

Today, Worley released an investor presentation and also announced its plan to transition toward sustainable energy. The announcement has had a negative effect on the Worley share price so far.

In the presentation, Worley indicated that many of its customers are moving toward renewable energy, a move sped up by recent volatility in oil prices. The company announced that key customers had reduced capex on hydrocarbon investments by around 30%. However, it stated that it had experienced an “accelerating wave of renewable energy investments, supported by energy storage, decarbonization projects and gas as a transition fuel.”

Additionally, Worley has announced it will work to become more sustainable in the way that it provides services to customers. It has committed to work with customers to deliver projects more sustainably across the entire life cycle. The company announced that it aims to create a net zero road map for direct carbon emissions. It will do this while helping customers to reduce their emissions with sustainable solutions.

Worley also suggested that it will assess its involvement in carbon-intensive projects. This could see the company turning down projects that produce heavy emissions and has undoubtedly contributed to the drop in the Worley share price today. 

Worley’s plan to transition into sustainable energy will take place across all of the sectors in which the company operates. Some of the company’s initiatives will include decarbonisation, energy efficiency, low carbon hydrogen, renewable energy, distributed energy systems, biofuels, carbon capture and storage, nuclear power, waste to energy and the use of gas as a transition fuel. 

In its announcement, Worley also flagged that the impact of the coronavirus had created some supply chain issues. This had slowed some projects and likely added to the negative pressure on the company’s share price today.

The Worley share price is down 33% since the beginning of January and down 38% from its 52 week high of $16.45. 

More reading

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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