Greencoat UK Wind PLC (LSE:UKW), one of the UK’s largest renewable energy investors, remains well-placed to deliver solid returns despite recent market challenges, according to investment research firm Kepler Partners.
With shares currently trading at a discount, UKW is focusing on efficient capital use to maximise value for shareholders.
Kepler highlights UKW’s robust cash flow, which allows it to not only cover dividends but also reinvest surplus funds to strengthen its portfolio.
This cash-generative approach has enabled UKW to adapt flexibly to market opportunities.
Surplus cash
Recently, UKW utilised surplus cash to repurchase shares while they traded at a discount and later acquired additional wind assets as the discount narrowed.
Kepler describes this dual strategy as a strength, allowing UKW to respond to opportunities without needing external capital.
It also points to UKW’s recent debt refinancing as evidence of its resilience. Despite rising interest rates, UKW secured new short-term debt at a minimal increase in cost, keeping the overall average interest rate at 4.68%.
The research house considers this level of gearing sustainable for the company’s long-term plans.
With a dividend yield of 7.5%, UKW offers a rate far above government bond yields, a draw for income-focused investors.
Dividend growth
Kepler notes that UKW’s inflation-linked contracts allow it to grow dividends in line with inflation, ensuring its yield remains competitive. It considers this an attractive proposition, especially for those seeking stable returns in renewable energy.
Although UKW’s shares are trading below their net asset value (NAV), Kepler suggests this discount could shrink if long-term bond rates decrease or if the renewable energy sector consolidates.
Lower bond yields would make UKW’s dividend yield even more appealing, potentially driving up demand for its shares.
Looking ahead, Kepler believes UKW’s strategic approach to capital allocation and cautious use of debt will appeal to investors interested in sustainable income and renewable energy.
Kepler concludes that, despite ongoing market uncertainties, UKW is well-positioned to support its dividend payments and continue its contributions to the UK’s transition to green energy.
In afternoon trading, the shares were up 1% at 132.85p.