The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
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.
Find out MoreLondon South East prides itself on its community spirit, and in order to keep the chat section problem free, we ask all members to follow these simple rules. In these rules, we refer to ourselves as "we", "us", "our". The user of the website is referred to as "you" and "your".
By posting on our share chat boards you are agreeing to the following:
The IP address of all posts is recorded to aid in enforcing these conditions. As a user you agree to any information you have entered being stored in a database. You agree that we have the right to remove, edit, move or close any topic or board at any time should we see fit. You agree that we have the right to remove any post without notice. You agree that we have the right to suspend your account without notice.
Please note some users may not behave properly and may post content that is misleading, untrue or offensive.
It is not possible for us to fully monitor all content all of the time but where we have actually received notice of any content that is potentially misleading, untrue, offensive, unlawful, infringes third party rights or is potentially in breach of these terms and conditions, then we will review such content, decide whether to remove it from this website and act accordingly.
Premium Members are members that have a premium subscription with London South East. You can subscribe here.
London South East does not endorse such members, and posts should not be construed as advice and represent the opinions of the authors, not those of London South East Ltd, or its affiliates.
SSE results released for Q1 highlight the issue-
'Onshore wind farm output of 715 gigawatt-hours was 29 per cent below planned levels for the quarter and 37 per cent lower than in the same period of last year as a result of the still weather conditions.
SSE’s offshore wind farms generated 496 gigawatt-hours, 16 per cent below planned level'
We seems to be making up for it now though.... and prices are still elevated.
Results and conference call next Thursday.
Lower CPI = win win. Cheaper tomatoes and higher stock prices. Happy days!
CPI
Catalyst?
Zac, I've only been investing for the last couple of years, and only have 6 UK equity holdings so far. They are AAF, CAML, CSN, LGEN, SMDS, UKW. They all have dividends over 5% except AAF, which I would say is more of a growth stock, but still with a decent dividend. I also have 4 US stocks, with good dividends.
Tichtich - I have a foot in both camps - dividend payers and non-dividend payers. For me both categories are growth in terms of trying to overall provide you with positive return (growth) on your investment.
With the L&G International Index Trust all I'm betting on (if that's the correct terminology) is that the global economy will continue to grow over the long term. Something its done for hundreds of years. Nothing else.
Out of interest which other dividend payers do you hold? Mine are LGEN, HHI, MRCH, HFEL, UKW, EAT and NCYF. Only UKW has come anywhere near the 5 & 10 year annualised returns delivered from the L&G tracker fund.
I'm down to 30% of my portfolio in dividend payers now. I fully intend to continue to reduce that contribution over time.
P.S. I take your point about dividend stocks. The reason I prefer them to more growthy stocks is because I'm a pessimist about growth over the coming years. But maybe that's just me being my usual over- pessimistic self.
Hi Zac. Sorry for the confusion. I was referring to the article linked to by get_rich_quick, which was the original subject of this thread. And although it's on the Yahoo Finance website, it's actually a re-post from the Motley Fool blog, as can be seen by the MF logo near the top of the page. I think Yahoo must have a deal with MF as I see them doing that all the time.
I’m on the south coast today and it’s been just a bit breezy for the past two days with more to come. Does this explain todays rise or is it just coincidence?
Ha, Ha.
Tichtich - not sure of the relevance of your first point. Where does Motley Fool fit into my post?
I'm the polar opposite to you. I actually want my investments to go up not down! I do agree with your statement regarding not taking too much notice of short term performance though. I invest for the long term so it's that performance that interests me. Out of my dividend paying holdings this is one of my better ones. So let's take a look at UKW annualised returns (with dividends reinvested) over 10, 5 and 3 years.
Here they are (10) +8.27%pa, (5) +7.32%pa & (3) +3.77%pa
Here's the same annualised returns from a global equity tracker fund - L&G International Index
(10) +10.59%pa, (5) +8.97%pa & (3) +10.32%
The differences mount up compounded over the long term. The above is the main reason why I'm slowly moving away from dividend paying investments.
Hi Zac.
1. The articles on the free Motley Fool blog are just superficial click bait intended to attract you to their paid subscription service (which I do subscribe to at the moment).
2. I can't see the point of worrying about one year total returns. They are meaningless if you are an investor rather than a trader, especially for dividend stocks. As long as UKW can continue increasing its dividend in line with RPI indefinitely, I don't care about the share price. That said, a fall in the share price could indicate investors' doubts about the long term sustainability of the dividend. But I think it has little to do with that and is almost entirely a reaction to high interest rates.
Personally, I would like to see my investments go down, as I have a lot of cash (well, short term bonds) that I'm hoping to invest at lower prices!
Brib - It does. It's not looking particularly promising for my dividend paying holdings this year to date though. If their share prices remain 'as-is' until year end here's my projected total return (capital & dividends) for 2023.
LGEN -3.1%, New City High Yield -5.0%, MRCH -3.3%, HHI +3.8%, HFEL -5.4%, EAT +0.9% & UKW -4.1%
I often ask myself why I bother with dividend paying holdings! Thankfully 70% of my portfolio is in global equity funds. I'd have been far better simply putting all of the above in a global tracker fund - my holding in L&G International Index is up almost 7.0% year to date.
That remains to be seen, as always
At what cost to your capital, though?
Https://uk.finance.yahoo.com/news/d-buy-11-650-shares-070044762.html
Well surprise surprise, the mentioned "Climate Lobby Group" netzerowatch.com, that seems to oppose all kinds of green energy including recommendations to dismantle the entire wind energy sector, has some dubious sponsors.
IMO of course those rules on ever decreasing strike prices should be rewritten. If this government caves in to the these shortsighted, oil loving, profiteering climate-change deniers, then fortunately it will only be temporary until a government that's pledged support to green energy steps in.
https://www.opendemocracy.net/en/dark-money-investigations/global-warming-policy-foundation-net-zero-watch-koch-brothers/
"An influential Tory-linked lobby group leading the backlash against the UK government’s net-zero policy has received hundreds of thousands of dollars from an oil-rich foundation with huge investments in energy firms, openDemocracy can reveal.
The Global Warming Policy Foundation (GWPF), which also campaigns as Net Zero Watch, has also received more than half a million dollars through a fund linked to the controversial billionaire Koch brothers.
The GWPF has long refused to disclose its donors and claims it will not take money from anyone with an interest in an energy company.
But tax documents filed with US authorities and uncovered by this website reveal the network of dark money behind it for the first time – including the $30m shares in 22 companies working in coal, oil and gas that are held by one of its donors."
Https://www.zerohedge.com/political/wind-industry-blackmails-uk-demanding-huge-ramp-subsidies
Hello tichtich,
You raise some important issues that I have been puzzling over.
First, I agree with your understanding of how the unlevered discount rate to used to calculate NAV. As you say, the nominal outstanding debt is deducted from the discounted revenues.
Second, I believe the levered discount rate is that which gives the same NAV as the above when the debt cashlows are projected and discounted. This is higher than the unleveraged discount rate because the company can borrow at a lower rate than 8% per annum. The unleveraged discount rate should be a more accurate estimate of the projected return on ukw shares.
Third, I cannot understanding why the 10% leveraged discount rate only gives a 9% return to the shareholders.
Is the company allowing for higher borrowing costs when it re-finances its existing loans?
Fourth, I agree that the projected real return is more useful than the nominal return. Your 9% minus 2.5% calculation is a slight overestimate because short term inflation rates are assumed to be higher than 2.5%.
Lastly, the calculation above assumes the investor buys the share for its NAV rather than market price. If the market price is lower than NAV, the projected return on buying the share is higher than implied by the leveraged discount rate. I have tried to construct a spreadsheet model that allows for this effect.
Hi Actuary63. I was planning to be an actuary at one time, but gave up the training after a year. Decided to go into software development instead. Well done for sticking with it!
Regarding the rate of return, the annual report says:
"As at 31 December 2022, the blended portfolio discount rate was 8.0 per cent. This is an unlevered discount rate and is therefore different to the discount rates quoted by peers. The equivalent levered discount rate (assuming 30 per cent gearing) is approximately 10 per cent, which delivers a net return to investors of approximately 9 per cent."
As I understand it, 8% is the discount rate used in the DCF calculation. I don't understand how they get the 10% and 9% rates, or how those are relevant.
The way I would look at it (perhaps too simplistically) is that the NAV is based on a DCF calculation with a discount rate of 8%. So if you buy at NAV and the DCF assumptions are realised in practice, you would earn a return of 8%. That said, the NAV does not evaluate debt repayments and interest as discounted cash flows. The current debt is simply deducted from the GAV to get the NAV. So maybe the other rates cited are intended to adjust for this.
If the rate of return is 9% as stated, what does that mean from an investor's point of view? Does it mean I will earn that rate of return if I buy at NAV (and the assumptions are realised) ?
Finally, I believe this is a nominal rate of return. I prefer to think in real terms. Since the DCF assumes a long term inflation rate of 2.5%, I reckon this would be equivalent to a real rate of return of 6.5%.
Hello tichtich,
Thanks for your comments about the discounted cash-flow method, which we actuaries are compelled to study in the professional exams!
What you said about the calculation being based entirely on the projected cash-flows from existing assets is correct and has important implications. If the DCF calculation predicts an internal rate of return of 9% per annum, it means enough cash is being generated by existing assets to give the shareholders an annual return of 9% plus the return of their capital. So if no new investments were made, the company would accumulate enough cash to make regular capital repayments as well as paying the dividend.
Lastly, although depreciation is not a cash-flow, it is allowed for implicitly in a DCF calculation because the term of the cash-flow stream is reducing over time, hence the DCF value of a wind farm will shrink to zero at the end of its useful life.
Hi Tichtich, thank you for sharing your thoughts and the calculations, found your take very useful,
May it be a good long term investment for all, I'm finding it rather amusing that the risk free rate is now 5% albeit it won't stay there for ever
May's wind speed data was 24% below the long term average, Aprils was also below, combined the two months come in at 15% below the long term average. The early part of June is unlikely to have been any better. I can see generation being well down this quarter although prices are still well above long term averages which should help to compensate.
The jet stream has now moved back to a more typical position so we are now back in a more 'settled' period of Southwesterly winds which should help generation.
Sold some shares to buy more of this dip. I've been waiting for 137p-140p to buy back those I sold at 157p
GLA!
I've managed to find my old calculation, so I'll quote it here. Note that the 5.3% mentioned below was the dividend yield at the time, and the dividend cover at that time was 1.5x.
'It seems to me that, for the business model to be sustainable, we should be treating part of the reinvestment of surpluses as providing for the eventual replacement of exhausted assets, at the end of their 30 year life. Based on a very rough calculation, it seems to me that about 1.6% of capital should be reinvested per annum to cover this replacement. (An asset life of 30 years would simplistically suggest replacement of 1/30 of capital per year, or 3.33%. But these replacement assets will be earning reinvestable surpluses over their lifetime; assuming a real return of 5.3% compounded, I reckon that reduces the required 3.33% to about 1.6%.) If we take market capitalization to be roughly representative of capital, that means reinvesting 1.6% of share price to cover replacement. At present the surplus cover (over dividend) is about 0.5 x 5.3% = 2.65% of share price. But if we say that 1.6% out of that 2.65% must be spent on replacement, and is therefore not "real" cover, then the real cover (after making provision for replacement) is only about 1.2x instead of 1.5x.'
Based on this, I should have said that the cover needed to pay for asset replacement is 1.3x, not the 1.2x that I wrote in my previous comment here. Obviously that figure should be treated as a very, very rough idea.
The '5.3