Despite the financial markets making an impressive comeback in recent months, value stocks continue to offer exciting bargains for patient long-term investors. And one such business that seems to have gone underappreciated lately is Greencoat UK Wind (LSE:UKW).
The business operates as a real estate investment trust (REIT). But instead of investing in properties and leasing them to families or businesses, it owns wind farms and sells the generated electricity to energy suppliers such as Centrica and E.ON.
It’s not the most exciting enterprise out there. But with demand for green electricity skyrocketing, the group’s free cash flow generation has been quite impressive since the firm became public in 2013. So it should be no surprise that 2023 marked the eighth consecutive year that Greencoat raised its dividends.
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Capitalising on a bargain yield
The recent stock market rally has seen Greencoat shares start moving back in the right direction. Investors were growing understandably concerned about the impact of rising interest rates on this business. After all, building and acquiring wind farms uses a lot of debt, and higher rates mean more cash flow gobbled up by leverage.
However, with inflation cooling, the Bank of England has since hit the pause button on further rate hikes, sparking newfound confidence – not just from investors but from the internal management team as well. In October, the company announced a new £100m share buyback programme along with its goal to increase dividends per share in 2024 to 10p.
That’s a 14.2% increase versus 2023 and at today’s share price, places the dividend yield at 6.8%. Is this goal realistic? I believe so.
With a robust balance sheet, management continued to invest in expanding its portfolio of wind assets over the last two years. And even in December, it acquired a 49.9% stake in the Kype Muir Extension, pushing the group’s total generating capacity to a new record high of 2,007 MW.
Today, the business no longer trades at a discount to its Net Asset Value (NAV). But as someone who’s interested in Greencoat’s cash-generating capabilities, I think this valuation metric isn’t all that useful. And on a free cash flow basis, the company continues to look like a terrific value stock, in my eyes.
Every investment has its risks
As promising as Greencoat appears on the surface, there are some caveats to consider. Even with stabilised interest rates, debt remains a point of contention. The group has close to £1.4bn of loan obligations & equivalents on its books that could impede the future expansion of dividends.
This performance drag is only boosted further by the tax levy the UK government has imposed on renewable energy generation companies for excess earnings. While neither appears to be a significant threat, they serve as an impediment to future earnings growth.
Regardless, with the impact of global warming becoming ever more apparent, the shift towards renewables is likely to accelerate in the long run. And with Greencoat already in an industry-leading position, it’s set to reap some tasty returns. At least, that’s what I think.
