Greencoat UK Wind (UKW) provides a pure investment exposure to UK wind farms, with the twin aims of delivering a high, RPI-linked income return for shareholders whilst maintaining capital value in real terms.
These aims have been fully met so far. As we discuss in the Dividend section, the dividend forecast for next year is 7.1p, representing a compound annual growth of 18.3% since listing. NAV progression has also remained ahead of inflation, with growth of 22.1% against RPI over the same period of 17.4%. In share-price terms, shareholders have enjoyed a total return of 115.1% since launch to 31 December 2019.
During 2019, the trust’s earnings were below budget thanks to wholesale power prices remaining below average last year and thanks also to lower power generation from the wind-farm portfolio. Even so, UKW’s dividend was well covered at 1.4x. The manager’s long-term expectation is 1.7x.
UKW continues to grow, and now has gross assets of £2.44bn invested in 35 wind farms. Despite a competitive market, the manager has deployed around £800m of capital (invested and committed) over 2019, and is now becoming ‘utility scale’. UKW now provides around 1% of UK electricity generated.
As we note in the Discount section, the publication of a bearish note on long-term electricity prices by Bloomberg New Energy Finance has caused a healthy reduction in the premiums across the sector, not to mention the recent market falls. UKW trades at a premium to the peer-group average, perhaps because of the higher investment returns so far delivered, the higher discount rate, and also because of its well-covered dividend.
UKW should continue to appeal to all sorts of investors. We believe that, having delivered on all of its promises, UKW offers valuable income and diversification properties to investors. In a classic tortoise-and-hare manner, UKW has outperformed the UK stock market since listing, generating returns in a very consistent manner.
As well as providing a very high dividend (prospective yield of 5.0%), dividend growth has matched RPI, and the capital value of the NAV has risen ahead of RPI. The trust employs a modest amount of gearing to enable this, but the resilience of the model has been shown last year when the dividend was 1.4x covered, despite lower power prices and less wind than average.
From an ESG perspective, UKW’s attractions are abundantly clear, in that UKW has a strong part to play in helping the UK shift to a lower-carbon economy. The trust’s continued growth has brought benefits to shareholders, not least in the OCF reducing significantly since listing. As we discuss in the Charges section, this is forecast to be 1.04% in 2020.
Worries about long-term power prices and wider equity-market movements have meant the whole sector has de-rated. In our view this is a welcome ‘release of steam’. It is always worth exercising caution if considering investing at a material premium to NAV. However, on a relative basis, recent market falls potentially present investors with an opportunity to add to a strongly performing and uncorrelated investment trust.
|High dividend yield, well covered by cash||High premium to NAV|
|Continued commitment to RPI-linked dividend growth||Gearing always exacerbates underlying asset valuation movements|
|Uncorrelated assets||Valuations based on long-term assumptions which may (or may not) prove optimistic|