In conversation with Stephen Gunnion, Stephen Lilley, the investment co-manager of Greencoat UK Wind PLC (LSE:UKW), delves into the company's revised capital allocation strategy. The interview comes on the heels of Greencoat's announcement to raise its annual dividend target to 10 pence per share.
Lilley expands on the rationale behind this move, the company's commitment to the risk-free rate and the capital asset pricing model, and its ongoing investments in wind power assets. The discussion also touches upon Greencoat's plans for a share buyback initiative, aimed at adding value and positioning the company attractively in the market.
Stephen Gunnion: Stephen, you've announced an update on your capital allocation this morning, including an increase in your annual dividend target to 10 pence a share. Could you elaborate on the rationale behind this decision?
Stephen Lilley: Certainly, Steve. The decision to increase the annual dividend target stems from a year-long evaluation of interest rate increases and share discounts. We initially increased the discount rate back in June 2022, aligning it with the risk-free rate and the capital asset pricing model. We've been monitoring these metrics and decided that it was time to increase the dividend to 10 pence a share. This move is also an effort to catch up with the excess net asset value (NAV) growth we've had since our IPO.
SG: So, you believe this is the most effective use of your capital at the moment, given the discount on shares?
SL: Absolutely. While we continue to invest in wind power assets, such as the recent investment in the London Array offshore wind farm, our primary focus remains on addressing the current discount to NAV. We believe that buying back £100 million of shares, which are at a 20% discount as of this morning, will be significantly NAV accretive.
SG: You mentioned a share buyback initiative. Could you provide more details on how this programme will operate?
SL: Of course. We generate approximately £200 million of excess cash annually. We plan to allocate up to £100 million of this for the share buyback initiative. This will be entirely funded through cash generation, without resorting to debt facilities.
SG: How do you balance the need to reward shareholders through dividends and the need to reinvest in assets like wind power?
SL: It's a capital allocation question. While we are keen on acquisitions and expanding our portfolio, we are currently trading at what we consider to be an unfair discount to NAV. Therefore, our immediate focus is on narrowing this discount. Once we are back at a premium, we will be in a better position to raise equity and make further investments.
SG: Your shares were up over a couple of percent this morning. Do you see this as a positive response to your new capital allocation strategy?
SL: Indeed, it's a step in the right direction. We hope that as people understand our commitment to a stable dividend and real NAV preservation, we will trade back to a premium. Until then, we will continue to add value by buying back shares at a discount.
SG: Since your admission to the London Stock Exchange in March 2013, Greencoat has generated £1,764 million in cash flow, paid £887 million in dividends, and reinvested £877 million. How do you view these figures in the context of your long-term strategy?
SL: These figures are a testament to our robust financial performance and prudent capital allocation. They reflect our commitment to rewarding shareholders while also reinvesting in lucrative opportunities in the renewable energy sector.