Chunky dividend cover: Greencoat UK Wind

Chunky dividend cover is the key to UKW’s resilient proposition…by William Heathcoat Amory

This trust has been awarded a rating by Kepler for alternative income…Find out more

Overview

Greencoat UK Wind (UKW) is the largest trust in the AIC Renewable Energy Infrastructure sector. UKW differs from its peers in a number of other ways. Firstly, its portfolio is largely exposed to unlevered windfarms only, giving it simplicity in what can be a hard-to-understand market. Secondly, its financial model is based on investing at high rates of return, which allows it to pay a well-covered dividend in most circumstances, and then use the surplus cashflows to grow the NAV on a real basis. Now that trusts across the peer group are trading at discounts to NAV, preventing equity fundraising, this feature arguably becomes an ever more important differentiator. UKW is also one of the rare trusts in the peer group that continues to link its dividend to UK RPI and grow its NAV on a real basis.

UKW’s simple model aims to provide attractive total returns over time, with a significant proportion of these returns coming in the form of a Dividend. The prospective dividend for 2024 yields 7.2% at the current share price. We believe investors should focus more on prospective total returns, which on a NAV basis stand at 10% per annum (on NAV) after fees if UKW’s long-term assumptions play out. As we discuss in the Discount section, if the shares re-rate from the current discount of 15%, and the portfolio performs as expected, then shareholders should achieve a higher share price total return.

During 2023 UKW generated c. 1.5% of UK electricity demand. In other words, this is a sizable trust that contributes meaningfully to the UK economy. For those investors who want their investments to earn a high investment return, as well as have a positive impact for society, then clearly UKW can claim to do both, as we discuss in the ESG section.

Analyst’s View

Having a “self-funding” model gives the board a range of options to optimise returns to shareholders. The increased dividend target of 10p for 2024, well above December 2024’s RPI increase, is reflective of the strong position UKW is in, but so too is the announced £100m buy-back facility, of which £75m remains.

Whilst UKW’s dividend yield of 7.4% is attractive relative to long-term bond yields, the real attraction to investors should be its double-digit prospective total returns, which are based on relatively conservative long-term expectations for energy prices and inflation. In our view, this is an attractive prospective return, and a significant margin over long-term gilt yields not to mention inflation-linked government bonds. The portfolio has so far proved robust in the face of downside power-price sensitivities, whilst offering upside to power prices, inflation, asset life extension, asset optimisation, new revenue streams, and at the current stage in the cycle, potentially to interest rates. However, there are risks, as there are with any investment proposition, and we discuss the potential headwinds to long-term returns in the Performance section.

Over the short term, as we illustrate in the Dividend section, dividend cover is robust even in very extreme scenarios for wholesale power prices. In the context of power price falls this year, this should reassure investors on both the ability of the trust to continue to increase its dividend by RPI, and that UKW will continue to have surplus cash to allocate in an accretive manner, providing good total NAV returns as well.

Bull

• High dividend yield well covered by cash, and “self-funding”
• Continued commitment to RPI-linked dividend growth, yet trading on a discount to NAV
• Diversified portfolio of institutional scale assets, spread around the UK

Bear

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_{Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by Greencoat UK Wind. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}