The UK is home to hundreds of quality dividend stocks. And while valuations have generally been rising this year, not all FTSE 350 constituents have been so fortunate. In fact, Foresight Solar Fund (LSE:FSFL) is now one of the highest-yielding income stocks in the index after its shares have taken a near-20% tumble since the start of 2024.
Foresight Solar shareholders have actually been stuck on a downward trajectory since late 2022. And this isn’t exactly surprising, given that it’s also around the time the impact of higher interest rates started to emerge. As the business carries a lot of debt on its balance sheet, higher interest expenses certainly justify some concern. But now that interest rates are once again falling, does the currently depressed valuation present a buying opportunity?
What’s going on with Foresight Solar?
With the impact of climate change becoming increasingly apparent, demand for clean energy sources continues to rise. More recently, this trend has been accelerating as electric vehicles and large language AI models continue to be deployed worldwide. And it’s a tailwind that Foresight Solar has been capitalising on for many years.
As its name suggests, the group owns a diverse portfolio of solar farms scattered across the UK. It also has a few assets in Europe and Australia, but management is in the process of disposing of the latter to refocus the portfolio. Regardless, the continuous need for electricity has provided the necessary cash flows to supply a rising dividend. And so far, shareholders have enjoyed nine years of consecutive dividend hikes.
Yet looking at the group’s latest results, the surge in demand doesn’t appear to be translating into financial growth. Over the first six months of 2024, operating revenue fell from £92.2m to £74.5m, with EBITDA tumbling from £79.1m to £60.6m.
There are a few factors at play. Electricity prices have normalised, creating some pricing headwinds. However, the larger issue is simply bad weather. The first half of 2024 saw some of the “worst weather conditions in the fund’s history”, preventing the solar business from maximising its generating capacity.
A buying opportunity?
Bad weather is frustrating and entirely out of management’s control. And it’s a risk factor that will persist and potentially even worsen as climate change continues. However, from a financial standpoint, shares of Foresight Solar do appear to have been overly punished by investors.
Today, the dividend stock trades at a 28% discount to its net asset value despite earnings remaining on track to support another dividend hike by the end of 2024. In the meantime, the proceeds of the Australian asset sale are being allocated to debt reduction in 2025, bolstering the group’s balance sheet health once market conditions improve.
In my opinion, this does suggest a buying opportunity may have emerged for my portfolio. And it would seem that management agrees, given that it’s been busy buying back shares. In fact, the firm’s share buyback scheme has recently been extended to repurchase a further £10m of them, bringing the total to £50m.
With exposure to renewables already present in my portfolio, I’m not rushing to buy Foresight Solar shares. But it’s definitely a business I’m taking a closer look at.
