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Daily Mail
11 hours ago
- Business
- Daily Mail
How to snatch a 10% dividend from cheap renewable energy trusts: INVESTING ANALYST
Renewable infrastructure trusts might have suffered of late, but that means some are offering bumper double-digit dividend yields. Is this an opportunity and could the future still be looking bright over the long term? In this column, William Heathcoat Amory, managing partner at Kepler Partners, says renewable infrastructure trusts could be a bargain if you know where to look. Renewable infrastructure trusts have taken a beating in recent years. The main reason for this is not hard to discern: a whopping circa 5 per cent increase in interest rates since 2022. This means that there are now a lot of interesting investments available to income investors that were not as high yielding previously. Renewable infrastructure trusts use considerable amounts of leverage (mostly fixed rate), and so the prospect of a significant increase in the cost of borrowing when it needs to be refinanced, poses a longer-term challenge for the asset class, and has spooked some investors. Those with short term borrowings are paying higher interest rates, and will be actively trying to sell assets to pay back these borrowings. The subdued sentiment means there are potential bargains to be found. The rise and fall of renewable energy trusts Fundamentally, renewables offer a high income, uncorrelated to equity markets and the economic cycle, with links to inflation. This meant that in the previous low-interest rate environment, they were on every income investor's shopping list. Most trusts traded at significant share price premiums to net asset value (NAV), and trusts issued shares regularly to meet demand. The sector mushroomed in size as a result. Nothing lasts forever though, and the current discounts to NAV are reflective of an inevitable readjustment, so that supply and demand for the shares of these trusts once again match. As the graph below shows, this process has already started with buybacks widespread, albeit relatively slowly. Consolidation is underway, with some trusts' shareholders having elected to realise assets over time and wind up. Others have the scale and quality that means they are likely to survive. Why renewables trusts are trading at a discount In contrast to traditional investment trusts which, when faced with a wide share price discount to NAV, have liquid underlying holdings which can be sold and the proceeds being used to buy shares back or return capital to shareholders, renewables trusts invest in hard assets – wind or solar farms. As one might imagine, these are illiquid. Much like selling a house, sales can be achieved but take time – especially if one wants the best price. This perhaps explains why discounts have persisted so long. Trusts are buying shares back, but perhaps not yet at a rate that has properly addressed the supply and demand imbalance. According to a recent presentation on TRIG, InfraRed Capital Partners (the company's managers) said that, despite the market softening over the past six months, there is still a good level of interest in renewables assets, with private market investors paying prices that reflect current NAVs. For TRIG, since 2022 the team have sold 10 per cent of the portfolio, (or £210million of assets) at prices which reflected a premium to NAV at the time of sale. This suggests that valuations that make up NAVs are fair, although clearly this is an opaque market and much can change. RENEWABLE ENERGY INFRASTRUCTURE TRUSTS Trust Total assets (£m) Discount to NAV % Dividend yield % Aquila European Renewables 513 -23.5 8.0 Bluefield Solar 1,300 -24.4 9.6 Downing Renewables & Infrastructure 300 -28.6 7.2 Foresight Environmental Infrastructure 846 -30.9 10.4 Gore Street Energy Storage 813 -36.4 10.8 Greencoat UK Wind 4,420 -24.0 9.1 NextEnergy Solar 1,079 -30.4 12.9 Octopus Renewables Infrastructure 1,064 -30.7 8.8 Renewables Infrastructure Group (TRIG) 3,122 -29.8 9.2 SDCL Efficiency Income 1,095 -52.0 14.4 VH Global Energy Infrastructure 412 -35.3 8.6 Source: AIC, all data as at 30/05/2025 Big dividends are on offer - are they backed up? The current discounts to NAV mean that for investors today, dividend yields are significantly higher than the yields that private market investors would expect. So what then are the prospects for investors in these trusts? As we highlight above, private market investors appear relatively sanguine on valuations. The discounts to NAV might reflect caution on gearing, which most trusts employ at a meaningful level. By and large, trusts either have fixed structural gearing on an asset specific basis, which is being paid down over time. Or they have trust level gearing, which will either need refinancing at a point in the future or repaid. Whichever way gearing is employed, owning assets that deliver high levels of cashflow, debt levels appear manageable over the short to medium term. Underpinning dividends are the cashflows that arise from inflation-linked subsidies and the proceeds from electricity sales. In some parts of the world, particularly the US, future subsidy regimes appear to be being unpicked. In the UK, we are in one of the foremost locations for wind power, and this – together with what Bill Gates called 'clever government subsidies that encouraged companies to invest' (in his book 'How to avoid a climate disaster') - is the reason why the UK has achieved a significant shift away from fossil fuel energy. According to data from a great open-source National Grid website Iamkate, the UK's electricity supply has gone from 68.7 per cent fossil fuel based in 2012 to only 28.2 per cent in 2024. What's on offer for UK investors? For denizens of the UK, it is often missed that we are at the forefront amongst countries in the energy transition. In particular, the UK is a significant leader in offshore wind, with installed capacity of offshore wind turbines far greater than the US in absolute terms, not just in proportion of the energy mix. In Gates' view, offshore wind power is one of the most promising technologies that needs to be better harnessed around the world to achieve a significant reduction in carbon emissions. As one might expect, within the renewable energy trusts, offshore wind represents a reasonable proportion of exposure. Greencoat UK Wind for example has 45 per cent of its portfolio in offshore wind farms, which offer high investment returns and is one of the reasons the trust has been the best performer in NAV total return terms in the peer group over the last three and five years. In early May this year, Ørsted announced that it had decided to discontinue its Hornsea 4 project in the UK in its current form due to the numbers not adding up in terms of investment return. This would have become one of the biggest offshore wind farms in the world, and so its cancellation or delay represents a blow to government and the UK's ambitions for decarbonisation and energy security. For shareholders in existing renewable assets, it's possible that this is a positive, in that there will be less generating capacity built out, and therefore higher long term electricity prices than would otherwise be the case. For wind farms owned by the likes of TRIG and Greencoat UK Wind, a rough rule of thumb is that around half of wind revenues come from subsidies, and half come from the proceeds of electricity sales. According to Iamkate, wholesale electricity prices have been relatively resilient over the past 12 months, at £82 per MWh, meaning that both trusts have been paying a covered dividend, and still repaying debt or re-investing in share buybacks or new assets. Both have demonstrated resilience in terms of dividend cover through difficult periods like 2020, when electricity prices fell dramatically during the COVID-19 crisis. The main attraction today is the high initial dividend yield, which as the table above suggests, many offer a multiple of the yield of the FTSE 100 (which yields 3.5 per cent at the time of writing). Verdict: An interesting moment for defensive income Renewables trusts offer a level of defensiveness to investors, not least because demand for energy is not likely to subside substantially. The price of energy is hard to predict and can fluctuate, but there are comparatively low levels of volatility in renewable infrastructure's cash flows. Renewable energy infrastructure assets typically have long economic lives, with low operating costs (especially compared to hydrocarbons) and over time generate a fairly predictable amount of energy. This makes forecasting cashflows simpler than it would be compared to many other asset classes. In addition, subsidies for renewables have a direct link to inflation. This means that if inflation remains persistent, renewable energy cashflows should increase. The result is that the income that renewable energy infrastructure assets produce can be resilient, and sometimes offer built-in upside sensitivity to inflation and energy prices. Investor sentiment towards renewables is not strong for perfectly good reasons, mainly because of higher interest rates, but exacerbated by political noises coming from America. But there are two fundamental reasons why the future for renewables in the UK and Europe remains bright. Firstly, de-carbonisation needs to happen, to reduce the harmful effects on climate change of future (and past) emissions of carbon dioxide. Secondly, energy security is increasingly important. In a world where old alliances seem to count for nothing, no government wants to find themselves in a position where they have to rely on an allegiance which may no-longer exist. Both of these themes provide a supportive backdrop for a long-term investment in renewable energy infrastructure. Across the renewables infrastructure sector, there are trusts exposed to different types of renewable technology and portfolios have different degrees of quality. As such it will pay to do a little research, and establish which have the highest quality portfolios but whose share prices have been dragged down unfairly with the peer group. With discounts wide but dividend yields remaining resilient, this may be an interesting moment to add some defensive income to a portfolio.
Daily Mail
09-05-2025
- Business
- Daily Mail
Investment trusts to back the unloved UK's undeniable opportunity: The INVESTING ANALYST
What if the UK market isn't the forgotten backwater of global investing but instead a hidden realm of impressive total returns? In this column, Josef Licsauer, Investment trust research analyst at Kepler Partners, explains why we shouldn't shun less glamourous London-listed stocks. The UK market has long been dismissed as an uninspiring place to invest. Lacking the high-growth tech giants that dominate the US, it's often seen as a home for 'boring' companies with little to no growth prospects—traditional banks, oil majors and tobacco stocks that don't carry the same excitement as the market-darling tech names splashed across headlines. At first glance, it's easy to see why. Years of economic uncertainty—from Brexit to a revolving door of political instability—have served to reinforce this perception. But such labels fail to capture the dynamism simmering beneath the surface—a market brimming with resilient, financially strong, yet undervalued opportunities hiding in plain sight. What's changed? For years, UK equites have traded at a discount to global markets, particularly the US, weighed down by sector composition, investor apathy, and the perception of limited growth potential. But the tide is turning, not least as recent events cause investors to question US exceptionalism. Since late 2021, rising interest rates have reshaped market dynamics. Despite a few cuts since August 2024, rates remain stubbornly high. In this environment, UK companies have delivered steady returns, benefitting from strong cash reserves and healthy balance sheets—factors that have favoured rate-sensitive and income-generating stocks over speculative, high-growth plays. Surprisingly, many UK stocks—particularly in the financial, service and defence sectors—have outperformed the AI-fuelled hype of the Magnificent Seven (Mag7). These companies have quietly delivered standout returns, seemingly flying under the radar but proving that there is more to UK equities; they can deliver growth, too. FTSE 100—big, boring, but beating expectations Clearly, the impact of tariffs on US tech giants has been stark Before Trump's early tariff murmurs, the performance of the Mag7 was much more comparable—but fortunes have shifted fast. These are high-growth innovators with huge return potential, but they're not immune to sharp reversals. In such a fast-moving environment, it's crucial to stay focussed on the long term and consider diversifying across other growth avenues—such as the often-overlooked UK names that have delivered not just resilience, but impressive growth. Over the past three years to 31 March 2025 – looking at pre-'Liberation Day' data to set aside recent volatility and instead focus on fundamentals over a few years' time horizon – several FTSE 100 stocks have quietly delivered outstanding returns, largely unnoticed by investors. When we compared the seven strongest-performing FTSE 100 names against the Mag7, UK stocks came out ahead, with average returns surpassing those of their high-growth US counterparts. Comparisons: Magnificent Seven versus the FTSE 100 Take NVIDIA—the best-performing Mag7 stock—propelled by its dominance in semiconductors and soaring AI demand. It delivered a staggering total return of 297.8 per cent, though that figure has slipped with recent tariff-driven volatility. At the start of the year, it was trading at a lofty P/E ratio of c. 50x, yet Rolls-Royce—trading at less than half that valuation—has delivered far superior returns. Meanwhile, the next six top performers in the FTSE 100—a mix of financial, services, and defence stocks—have outperformed five out of the seven Mag7 stocks. Expanding the view further, the next 31 top-performing FTSE 100—including Babcock International Group, Imperial Brands and Barclays—have also outpaced five of the Mag7, delivering returns of 126.3 per cent, 120.3 per cent, and 119.3 per cent, respectively. Not bad for what many still consider the Jurassic Park of stock markets. A key driver behind this quiet resurgence? Capital discipline. Many UK-listed firms are in far stronger financial positions than a decade ago—an essential advantage in a high-interest-rate environment. Fundamentals are improving, with higher return on equity and reduced leverage pointing to stronger profitability and healthier balance sheets. Crucially, this financial strength is being channelled into shareholder-friendly actions that are driving stock returns. Steadily increasing dividends remain a cornerstone of UK investing, while a surge in share buybacks— nearly half of UK-listed companies repurchased shares last year, the highest percentage among global markets—signals that companies themselves recognise their undervaluation and are taking proactive steps to enhance shareholder returns. Simultaneously, persistently low valuations have fuelled a wave of corporate takeover activity, with international buyers looking to snap-up UK companies at discounts to intrinsic value. These factors, combined, are driving total returns and reinforcing the investment case for UK equities. Beyond the FTSE 100 horizon But the buck doesn't stop there. Further down the market-cap spectrum, several small- and mid-cap stocks have delivered equally impressive outperformance over the same three-year period. Among FTSE 250 constituents, financial firms like Lion Finance (+473.0 per cent) and TBC Bank (+374.7 per cent) have significantly outperformed all Mag7 stocks, while others—XPS Pensions (+244.9 per cent) and ME Group (+235.3 per cent)—have beaten all but one of the Mag7. And in the AIM market, a standout performer is a UK tech stock—yes, you heard that right. Filtronic, a specialist communications equipment provider listed on AIM, hasn't just kept pace with the Mag7 but flown past them, delivering an eye-watering 816.9 per cent return over the past three years. Much like their larger counterparts, these companies have thrived on strong cash flows, higher rates, acquisitions, and a focus on robust shareholder returns. Active managers finding opportunities others might miss Many UK stocks trade at lower valuations than high-growth US tech, yet some—like those highlighted earlier—offer comparable or even superior growth profiles. So why are they being overlooked? One reason is visibility. Unlike the Mag7, whose products are ingrained in daily life, many of the UK's best-performing stocks operate behind the scenes, lacking the same front-facing brand recognition. Meanwhile, the broader UK market has lagged the US, which combined with its ongoing economic issues have likely dampened investor sentiment further. Yet, within this seemingly sluggish market, active stock pickers—particularly through investment trusts—have delivered strong returns by uncovering undervalued, financially sound businesses, like the ones highlighted earlier. Despite this, many UK-focussed investment trusts remain on wide discounts to NAV, reflecting past struggles and lingering scepticism. For contrarian investors, this presents an opportunity—not just for potential upside if sentiment shifts, but also enhanced yield in income-generating trusts. Take Edinburgh Investment Trust (EDIN), currently trading at a wider discount than both its five-year average and sector. Despite this, it's outperformed its benchmark by 9.3 percentage points over the past three years (to 31/03/2025). Its balanced, total-return approach—focussing on high-quality businesses like NatWest, that prioritise shareholder returns—has thrived amid a high-rate environment. Similarly, Temple Bar (TMPL) has beaten its benchmark by 21.0 percentage points over the same period. Its disciplined value investing approach—targeting attractively valued business with strong cash generation and sustainable dividend growth—has led to holdings like Standard Chartered which align with its shareholder-focussed, total return ethos. This focus has helped it navigate challenging markets. While its discount is narrower than its five-year average, it remains wider than the sector, still offering investors a differentiated way to access UK equities. Opportunities extend to smaller companies too. Fidelity Special Values (FSV) takes a multi-cap approach, diverging significantly from the FTSE All-Share to target overlooked and undervalued opportunities across the market-cap spectrum, including TBC Bank. With smaller companies receiving less analyst coverage, it creates a fertile ground for discovering mispriced opportunities. It's outperformed its benchmark by 6.0 percentage points over the past three years, and while it trades at slightly narrower discount compared to its five-year average it offers investors differentiated access to this part of the market. At the smaller end of the scale, Rockwood Strategic (RKW) focusses on companies trading at steep discounts to their intrinsic value, often overlooked due to limited research coverage and institutional interest—Filtronic being a standout performer. This strategy has driven sector-leading performance, with RKW outperforming its benchmark by 50.6 percentage points over three years. While it currently trades close to par, RKW's distinct approach and differentiated portfolio provide investors with unique access to UK equities. The UK market remains unloved, yet beneath the surface lie undervalued opportunities. Improving fundamentals alongside attractive valuations suggest that now could be a good time to time to look at UK equities—particularly through investment trusts, many of which trade at historically wide discounts. While the UK may lack the speculative excitement of AI-driven stocks, it offers something equally valuable—resilient businesses, strong cash flows, and a commitment to shareholder returns. Recent market swings drive this home. Tariff-related volatility has triggered sharp sell-offs in major US names, erasing gains built up over years. While global markets have felt some ripple effects, it's been to a much lesser extent and the UK has delivered a modest positive return year-to-date, compared with an 8 per cent drop in the S&P 500. This isn't a call to abandon high-growth US tech or shift entirely to the UK. It's about balance. The UK market can serve as a valuable diversifier in a growth-heavy portfolio, providing access to a market that remains underappreciated yet rich with stock-specific opportunities. For investors willing to look past the headlines, UK trusts offer a compelling entry point to these opportunities.
