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To invest mostly in operating UK wind farms with the aim to provide investors with an annual dividend that increases in line with RPI inflation while preserving the capital value of its investment portfolio.
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I have two main concerns about the long term future for intermittent renewables, like wind:
1. I suspect that the true cost of electricity from intermittent renewables is much higher than most people realise. I often hear about how cheap renewable energy now is, but I don't think this takes into account the extra costs that are incurred by the system in coping with the intermittency. These extra costs include: electricity from wind being wasted when there's too much of it (I believe the generating company gets paid for the wasted electricity, at the consumer's expense); the cost of batteries that are used to store intermittent electricity for short periods (I think these are mainly used with solar energy); the unit cost of gas-fired electricity being increased because power stations are running at reduced capacity just to fill in when there's not enough wind (so the building and running costs of the power station are spread over fewer units of electricity produced); the grid needing to be expanded to accommodate new wind farms, which tend to be much further from consumers than power stations are. These extra costs fall on the consumer and taxpayer. Over time perhaps the generating companies will be made to shoulder more of the cost. (Consultations are already in progress over a new electricity pricing system, "REMA".)
2. New or improved non-intermittent technologies may replace intermittent ones. I'm thinking mainly of nuclear and geothermal.
On the other hand, the development of cost-effective longer-term energy storage technologies would be good for intermittent renewables, as would cost- effective conversion of surplus electricity to hydrogen.
All in all, I think there a lot of uncertainty about the long term future for intermittent renewables, and that's the one thing that stops me buying more of them.
Actuary -I agree with your conclusion (or I would not be invested here!).
Clearly the high energy prices recently have enabled them to reduce debt, but prior to this I think that a lot of their 're-investment' and growth has come from issuing new equity at a premium which is currently not an option.
Tichtich- It's a good point about the value of the debt/real rates. I also think that the managers have a good conservative approach with the way the business is run, being very selective of the assets they purchase, and the way they manage debt.
I guess for everyone it is about where you think inflation /interest rates will be in the next few years. For us as retail investors it is far easier for us to pivot than II's, so although I try and keep reasonably diversified I do wonder whether I should? I did consider ditching the 'alternatives ' once it was clear interest rates were on the way up, I got out of Reits but kept my holdings here at at BBGI as there was a degree of inflation linking .
It's nice to have be able to have a sensible discussion on one of these boards- thanks.
All good points, Monkshood.
From a personal point of view, I wouldn't invest in long term fixed income bonds, because I'm afraid that we're entering a long period of higher inflation. I'm already semi-retired, and part of my income is from a fixed annuity, which is really hurt by inflation, so I want to hedge by making sure my investment income is well protected from inflation.
For pension funds/companies with fixed liabilities (such as the one paying my annuity) it makes sense to invest in fixed income bonds. But I wonder whether some pension funds are exposing themselves to excessive inflation risk by holding too much fixed income.
Anyway, getting back to the subject of UKW, I had a look at their last annual report the other day, and one of the things I particularly looked out for was how exposed they are to increasing interest rates. One good point is that their gearing is only about 30%, which is lower than other renewables companies I've looked at. It's also good that they have some pretty long maturity debt at low interest rates. Not so good is that about a third of their debt is due to mature within the next 2 years. If they roll over that debt, it will presumably have to be at a much higher rate than they are currently paying. But perhaps they will be able to pay down some of that debt out of whatever remains from last year's windfall or next year's profits.
Anyway, I'm not too worried about interest on debts, because I expect_real_ interest rates to remain low. The short term cost of higher nominal rates is offset by the fact that the real value of the debt is being slashed by inflation.
Hello Monkshood,
You are correct that UKW shares are more risky than gilts and should offer a risk premium. The long gilt yield is currently 4.5% per annum, so if future inflation were 3% per annum, the real gilt yield would be 1.5% per annum. The real yield on UKW shares is currently 6% per annum, implying a risk premium of 4.5% per annum relative to gilts.
As for maintaining UKW's inflation-linked dividend, this has been achieved by re-investing a large share of the profits to grow the assets of the business. High energy prices have produced a temporary windfall, but the valuation model in the accounts assumes that energy prices will fall to more normal levels. Gearing currently gives a 2% per annum uplift to the return on equity, so this margin will reduce (but not disappear) with higher borrowing costs.
Ultimately, it comes down to whether you believe the current risk premium is sufficient. Given the high dividend coverage and growing demand for green energy, it looks sufficient to me.
Actuary,- You make a good point but it does ignore the premium you need when compared to the risk free element of gilts.
Although a tranche of UKW's income is inflation linked, not all is. They have debt which will cost more to service when it comes up for renewal, the assets also have a (fairly) fixed life span. There are other risks, both from government intervention and possible extreme weather events.
Will UKW be able to maintain inflation linkage of their divis over the longer term?
For large pension funds looking decades ahead the risk free element of a high fixed return tips the balance increasingly in that direction with every rate increase.
I couldn't find that article.
UKW has money in its coffers so I don't see why their broker would be forcing some of their investors to sell to raise capital.
But, as always with private investors, we are always the last to know the true picture.
ATB.
@Gavster-NBC
Just a guess, FT had an article about forced selling.
Hello everyone,
I agree that higher bond yields are probably driving the share price down. However it isn't technically correct to compare the yield from an inflation-linked income stream like UKW with the yield on fixed interest securities.
The appropriate metric to compare the UKW dividend yield with is the expected real bond yield, i.e. the nominal yield minus expected future inflation. If we assume expected future inflation = 4% per annum, UKW is providing a higher yield than all but the most risky bonds.
Thanks all.
Another director buys up shares at 140p spending £140,000.
Good enough for them, good enough for us Retail ?
The opinion that the SP goes down for a higher yield due to interest rates is very valid IMO. Seems to be happening all over and we've all been expecting TBH, but for me I still expected that last bounce up towards ex-div. Reminds of a famous interview with W Buffet where he talks about the bargains during high inflation back when he started investing.
@Foobar why Odey Asset Management ?
They are not listed anywhere here : https://www.morningstar.com/cefs/xlon/ukw/ownership
Why the drop ?
Market sentiment..... Even high yielders like IMB & LGEN are sat 15-20% lower than their 12 month highs.
I wouldn't add any more UKW at 150p or more but will show nterest n the 130's
In my opinion, it's mainly interest rates. We saw a similar drop (even lower) last year after the Truss mini-budget. There may also be a significant contribution from lower gas/electricity prices. It will be interesting to say what happens if we have a much colder winter this year.
I try not to worry about a falling share price, as I'm holding for the dividends over the long term. A lower price can even be a good thing if you want to buy more. Of course, it's another matter if the falling share price reflects an actual worsening of the company's prospects. I don't think that's the case here (or I wouldn't have just bought some more).
2. Low gas prices are probably having some effect too
Probably a combination of falling energy price, low wind (at least in the North/Ireland where they have the majority of turbines) and the prospect higher for longer interest rates.
You can get 2 year UK Gilts paying 5% now so the attraction of alternatives has diminished. You can see this across the board, most Infrastructure funds, REITs etc are also well down.
The other issue that a lot of these sectors have is that they can now no longer issue shares at a premium so it has also reduced their cash/liquidity . In past circumstances UKW would probably have issued shares by now to reduce debt and put themselves in a position to purchase another windfarm.
Possibly Odey Asset Management is selling.
I am in the same boat, these were flying a few months ago, something has spooked the share price, thinking of adding but not yet.
£500k in two director buys last few days, and the sell off continues. Chartwise I reckoned on a bounce at 145 and a climb over 150 towards the summer ex-div. Now we have a bottom which is anyone's guess, or a rerate to a new yield. Is it the possibility of a Labour government setting new rules on subsidies ? Is there a fundamental justification for that 130p SP mentioned below? If so then why did those directors buy at 142/147. Or just a straightforward sell-off by a particular large holder, for reasons not market-related..
Interested in peoples opinions.
Divi too low here in comparison to other renewables. I will look to buy here at 130p or lower.
Well, after looking at NESF and BSIF (and having looked at other renewables companies recently), I still like UKW best. And even though I know I should diversify, I can't bring myself to buy second best! So I bought some more UKW, at 140p.
I'm still half-expecting a significant market correction from here, and holding back some cash and equivalents to take advantage of any bargains. LGEN is on my watchlist, but I'm wary of financials at the moment and waiting for a bigger margin of safety. I already own CSN, a smaller pensions company, with similar yield to LGEN, but seems less volatile.)
Prices still falling, so I'm in no rush to buy. Other renewables are looking good too, so I may diversify a bit. NESF has a forward yield over 8.2%, based on its target dividend of 8.35p. I'll take a closer look at it.
That said, I'm still concerned about the long term future for renewables investments, so a bit reluctant to buy more.
Get_rich_quick
So does Legal & General - and you'll enjoy 2x the dividend while you wait
Not advice or a recommendation just another potential option to consider!
I'm a huge advocate of UKW, but the BP share price does seem quite attractive at the moment!
I sold out at £1.59 a while ago and got back in at £1.48 last week.....Am surprised it's still dropping still have a bit left for this years isa it's a toss up between this and BP
From 12 months ago down from £1.60 ish. WeekEnergy prices n threat of Labour government GB Energy Company announcement in October 22. But at least good dividend.
I'm thinking about adding more on Monday too.
What has overly spooked the SP?
I've just read a report that UKW have funded £125k to assist with recycling old wind turbines, which I'm aware is an issue, but I can only presume market sentiment on a whole has pulled it back a few %.
That said, come Monday, I may add more, as we are now below my average share price.
https://renews.biz/86365/wind-turbine-recycling-project-secures-funding/
Hi wetherboy. Well, advances in energy storage technology would be good for renewables, but it doesn't follow that energy storage stocks are a good investment.
I'm looking for safe investments, so not so keen on companies which are developing the technology. I've looked at companies which use current battery technology, like GSF (which has a nice yield). I'm put off by the knowledge that lithium ion batteries degrade over time, though that shouldn't really matter if it's priced in. Anyway, I have GSF on my watch list, but I'm not biting yet.
By the way current yield on UKW just hit 6%!