Greencoat UK Wind outperforming despite the conditions

Greencoat UK Wind [LON:UKW), the London-based investment company specialising in UK wind farms has had a tough couple of years, like many funds in its Association of Investment Companies (AIC) sector, Renewable Energy Infrastructure.

However, the investment trust is one of the better-performing funds in the sector, returning +35.9% (on a share price total return) over five years to 17th May, against a sector return of +10.39%. Over 10-years Greencoat UK Wind beat the sector benchmark by 52 percentage points to return +137.9%.

• Retail investors get Scottish wind farm project over the line
• HFI is harnessing the wind for a hydrogen future
• Great British Energy could be a game-changer for Good Energy

More recently the fund has been dragged down by factors that have affected the entire Renewable Energy supply chain, most presciently rising interest rates, which has made borrowing for renewable energy projects – which up-front are highly capital intensive – more expensive, reducing short-term profitability and investor enthusiasm.

Interest rates and inflation

Central Banks started cranking up interest rates to combat inflation – exacerbated ironically by a spike in energy prices after Russia invaded Ukraine and sanctions imposed on the aggressor took its significant gas and oil reserves out of the global supply chain. The resulting increase in materials cost and labour costs significantly affected the Renewables sector, squeezing profit margins and making projects more expensive to complete.

War in the Middle East, especially the Houthi actions in the Red Sea in response to Israel’s invasion of Gaza, also saw global supply chains tested, which made it difficult and more expensive to obtain key components (primarily manufactured in Asia) for renewable energy projects which caused delays and impacted project timelines.

The Transition theme has been hot for about a decade, which has seen the renewable energy industry become the golden child of investment alongside pharma and AI. However, the theme is coming off the boil somewhat, especially with central government budgets coming under pressure since the Coronavirus pandemic and the realisation of the real costs of throwaway ministerial comments with regards to Net Zero. This has seen the investment industry start to correct what they see as over-hyped valuations for many companies (and funds) in the Renewables sector, which has led to share price declines.

Simple, sustainable and transparent

Launched in March 2013, the GBP3.3bn Greencoat UK Wind fund is a constituent of the FTSE250 index. It invests in operating UK wind farms to provide shareholders with a sustainable and transparent income stream through an annual dividend on the issue price of 100p. The UK-based company was the first renewable infrastructure fund to list on the LSE main market and is the only infrastructure fund or renewable infrastructure fund domiciled in the UK.

Greencoat UK Wind’s aim is to provide investors with a sustainable annual dividend per ordinary share that increases in line with RPI inflation while preserving the portfolio’s capital value in the long term, on a real basis, through reinvestment of excess cashflow and the prudent use of portfolio leverage.

The fund is managed by Stephen Lilley and Matt Ridley, partners at leading European renewable investment manager, Schroders Greencoat. which was founded in 2009 and has GBP10bn assets under management. Lilley has been in the investment business for 25 years, joining M&G Investment Management after six years in the nuclear energy industry. Ridley has been a fund manager for 22 years; sixteen of them in wind.

The company has been a regular dividend payer, paying 2.5p/share in May, 3.43p/share in February, 2.19p/share in November 2023 and 2.19p/share in August 2023. The company pays dividends four times a year. The company also has been reorganising its share structure, having just completed a buyback of 100,002 shares at an average price of 142.59p (the company’s shares opened trading at 143p on 21st May) as part of an ongoing GBP100m share repurchase programme launched in October 2023.

It’s not all been plain sailing for the fund. Last month, management faced-down a minor shareholder revolt to discontinue the fund, with 11.3% of its shareholders voting to discontinue. However, the UK government has thrown all its chips at offshore wind in its pledges to meet Net Zero commitments, something the next government will no doubt reiterate, as in the British Isles wind is the best renewable option on the table currently.

Greencoat UK Wind top five holdings

Source: AIC, 31st December 2023

Yes, the sector has had a tough run, but the current climate is temporary, the long-term outlook for renewable energy remains positive due to factors like the urgent need to address climate change and in its sector Greencoat UK Wind can be considered best-in-class.