This FTSE 250 stock’s just cut its dividend. But here are 3 reasons why I’m not selling my shares…

It’s always disappointing when a dividend share fails to live up to expectations. But it’s not necessarily the end of the world if a stock’s payout is cut. In fact, it could be a case of short-term pain for long-term gain. Is this the case with this FTSE 250 stock? Let’s try and find out.

Mixed news

This week (5 March), Harbour Energy (LSE:HBR) released its 2025 results. The energy group’s boss declared that “significant progress” had been made during the year.

But a few months ago, the group said it was introducing a new distributions policy. Often, this is a sign that a cut’s coming. After all, if it was going to be good news, why wait to announce it? Therefore, it didn’t come as much of a surprise when the group unveiled a 2025 full-year reduction in its dividend to 21.24 cents. Compared to 2024, that’s an 18.9% cut.

For 2026, the group’s planning to pay a “base dividend” of 16.1 cents a share ($300m) with the intention of returning 45%-75% of free cash flow (FCF) to shareholders. This implies a forward yield of 4.2%. Twelve months ago — as a reminder that high yields should be viewed with caution — the stock was offering a return of over 10%.

However, there are three reasons why I plan to keep my shares and why I believe others could consider adding some to their own portfolios. Although I acknowledge the sector doesn’t appeal to everyone.

1. Debt reduction

Going forward, the group wants to reduce its gearing, which is likely to reduce borrowing costs and improve investor sentiment.

For as long as the group’s ratio of net debt to EBITDAX (earnings before interest, tax, depreciation, amortisation, and exploration costs) is above one, it will pay a dividend at the lower end of its stated range. Below one and it will “pay out towards the top end”.

Due to acquisitions, gearing’s expected to be around one until the end of 2028.

2. Expansion

The group’s continuing to move away from its North Sea roots, where its earnings are taxed at 78%.

Most notably, it’s just completed a $3.2bn deal to buy the LLOG Exploration Company. This will see it operate from the US deepwater Gulf for the first time. It will also add significantly to reserves.

FCF’s expected to be $600m in 2026, rising to $1bn by 2028, as a result of recent deals.

3. Healthy prices

Harbour Energy’s forecasts are based on an assumption of $65 for Brent crude and $11 per thousand standard cubic feet for European gas. Currently (6 March), prices are comfortably above these levels. But they can be volatile so it’s unwise to base an investment decision entirely on present market conditions. Having said that, it would be silly to ignore them altogether.

Harbour Energy’s dividend cut is unfortunate. But with its expansion plans and debt reduction programme, I’m confident it will soon be in a position to increase its dividend once more.

Get its house in order and the group could be returning 75% of $1bn – 2.5 times more than is planned for 2026 – to shareholders by 2028. And even if I’m wrong, I reckon we could see some share price growth as investors recognise the group’s future potential.

The post This FTSE 250 stock’s just cut its dividend. But here are 3 reasons why I’m not selling my shares… appeared first on The Motley Fool UK.

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James Beard has positions in Harbour Energy Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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