On face value, this looks like a wonderful stock to invest in. They exhibit wonderful revenue growth, great net asset growth and a 40-80% net profit margin that any investor would die for. Yet their share price has only risen from £1.19 to £1.50 since 2017. So what’s the catch? Here’s 5 reasons i’m not investing in Greencoat Wind.
When I first ran my initial pass on Greencoat UK Wind plc [LSE: UKW] I became quite excited.
Here’s a UK stock that’s showing some wonderful face value numbers. In the last 5 years alone, revenue has risen from £81m a year to £423m. Net asset value has risen from £1.1 billion to £4 billion. And the profit margins are insane ranging between 40-80% a year.
Yet, after spending several days analysing the business, I have made the conscious decision not to invest in this £1.50 stock.
Today, I want to look at why that is.
Brief Background
Greencoat UK Wind are the leading renewable infrastructure investment fund, solely focused on investing shareholder capital into operating UK wind farms. The company focus is to utilise shareholder money to invest into the complete or partial ownership of UK wind farms, selling the electricity generated to utility companies for a profit.
Wind is the largest scale renewable energy technology. The UK has £60 billion of wind farms in operation.
Those profits are largely paid back out in the form of dividends which is the companies main focus of value-add for its shareholders.
A focus on Dividend payouts
Costs and expenses for this business are very low, hence the high profitability. In 2021, Greencoat generated a £423m return on the sale of electricity from the wind farm portfolio. After expenses of running the business and the payment of interest on debt, Greencoat kept a whopping 85% of that revenue as profit.
That’s a profit margin rarely seen across the FTSE, and usually, if this were a traditional business, i’d be extremely excited.
What puts me off this stock is what the business do with the profits.
Greencoat UK Wind love to pay dividends. Which is great, shareholders love dividends. Unlike most other FTSE stocks, Greencoat love to pay these out quarterly also. Meaning 4 payouts each year.
The issue here is that the business is unable to use that capital for growth. Yes, it attracts investors looking to capitalise on the 5-6% dividend yield that’s achievable from today’s £1.50 share price. However, it means that capital is not being used to re-invest back into expanding it’s portfolio of income producing assets.
In fact, the company actively market their dividend as their core focus. They aim to produce a dividend each year to meet inflation.
This will ultimately slow down growth.
Whilst it’s not a reason on its own not to invest, it is the start of a larger list of reasons.
Share Placements
Greencoat UK Wind plc are constantly making acquisitions. They’ve done so at an impressive rate. In 2013 (the year they floated on the London Stock Exchange) the company owned or held shared interest in 6 wind farms generating 291.5 GWh of electricity.
The company have an aggressive acquisition policy which has led them to reaching a portfolio of 38 wind farms producing 2,925 GWh of electricity by 2020. That number has since risen much higher.
However, the financing of these purchases largely come from the placement of shares.
Greencoat issue new shares every single year to raise the capital for these acquisitions.
This again slows down growth. Whilst the company are growing their portfolio of wind farms, increasing revenue and profits, this is being diluted year after year by issuing more shares.
To be more accurate however, the acquisitions are actually being financed through debt. The share placements are then being used to pay down that debt each year to keep it at bay.
So whilst the business growth is super exciting as an investor, it suddenly has less appeal when you realise that the number of outstanding shares in Greencoat have risen, yearly, from 341m shares in 2013, to 2.3 billion in 2021.
Now, it must be said that despite this, the value of shares are rising as these acquisitions are being partially funded by profits as well. We can track this by looking at the net assets per share.
The assets, minus the liabilities, give us the net assets of the business (otherwise known as equity). When we look at the net asset value of the business on a per share basis in 2013 we can see it came to £1.03 per share.
Whilst the number of shares in circulation are dramatically rising year on year, so is the net asset value. In fact, slightly faster. Which means that by 2021 the net asset value per share had climbed to £1.33.
My Final Thoughts
Personally, as an investor looking for exciting growth stocks, I would prefer to see this company lower their dividend, keep more of the profit generated each year, and re-invest that profit back into the expansion of their portfolio. This would lead to less reliance on debt and share placements.
They could also use some of the profit to buy-back some shares, reducing the number of shares in circulation. Thus raising the value of the shares themselves.
Unfortunately, this is why Greencoat UK Wind has grown in share price value relatively slowly. The rise from £1.19 to £1.40 between 2017 and 2021 is a growth of +17%. That’s a straight-line growth rate of 3.4% a year. Hardly the exciting growth stock I am looking for.
Still A Great Dividend Stock
I still very much like this stock. Yes it’s an investment trust, not a traditional business as such.
But they are still a highly profitable, dependable little stock. It’s the train that just keeps on going. Look at the share price over the last 2 years for instance. When every other stock has been crumbling and losing 30-40% in share price value, UKW has kept on rolling.
Any investors interested in diversity might look at this stock with excitement.
They also pay a solid dividend, and pay it out quarterly. That’ll attract more investors.
And to be honest, there are significantly worse stocks out there than Greencoat UK Wind.
But they are just not the exciting growth stock i’m looking for.
This stock will churn over year after year, pumping 5-6% dividends out or more each year, and they’ll keep rolling forward, probably rising at their 3% a year in share price value. It’ll be this slow a growth, however, because they give away profits and finance their growth through the creation of more shares. Constantly diluting those in circulation and increasing supply and stunting share price growth.
It is for that reason alone that I will be choosing to invest my capital in other, faster-growth opportunities on the market.
But if you own UKW, I think you have a dependable little slow growth stock there that probably won’t cause you any problems. I would expect this stock to hit £2.50 in the next 10 years if they continued doing exactly what they are doing now.
