Greencoat UK Wind PLC (LSE:UKW) (UKW) recently announced an increased dividend to 10p per share and a significant share buyback programme.
The new dividend represented a 14.2% increase on the 2023 target that the board had set and implied a forward yield of 7.1% (2 Nov), notes research house Kepler.
In the same announcement, the trust’s board also noted that it would be initiating a £100 million share buyback programme.
Kepler, in its research note, highlights this as a bullish signal from the board, reflecting the disparity between the share price and the underlying performance of UKW.
The trust's ability to maintain dividend growth and generate surplus cash, even in scenarios of falling power prices and elevated inflation, is a clear indicator of its strong financial footing.
The Discount Dilemma and Prospective Returns
According to Kepler, the discrepancy between UKW's share price and NAV suggests that the trust’s discount rate implies a total return of over 11%, inclusive of management fees.
This positions the prospective return for investors in UKW at approximately 6.5% ahead of the return from buying 10-year UK gilts today.
However, it's crucial to remember that these returns are not guaranteed, and risks remain, said the researcher.
Kepler points out the management team and board's continued investment in UKW shares, alongside the significant shares owned by Schroders Greencoat, again demonstrating confidence in the future.
Beyond Yield: The Bigger Picture
A critical aspect of UKW's strategy is that since its IPO in 2013 it has not only paid out £887 million in dividends but also reinvested £877 million.
This reinvestment is a key driver of returns, leading to rising capital returns and a growing dividend.
The trust's ability to generate substantial cash and reinvest it effectively is a significant factor in its overall performance, Kepler argues.
In 2023 alone, UKW is on track to generate £200 million in excess cash, over and above the dividend paid.
This financial strength allows for flexibility in undertaking the buyback programme and potentially retiring debt or making further acquisitions.
Conclusion: A Waiting Game with Potential Rewards
Kepler concludes that the current situation with UKW presents a waiting game for investors, albeit with the prospect of being rewarded through a high dividend yield.
As the market begins to recognize the trust's robust cash generation and reinvestment capabilities, investors might see benefits beyond just the dividend yield.
The wide discount, as Kepler suggests, might be a result of market irrationality and the political and economic uncertainties of the past years.
However, for those who see beyond the immediate yield, UKW offers strong fundamentals and a clear plan for the future.