Image source: Getty Images
This may be a contrarian view, but I’m a little concerned by the market. I fear it’s starting to look a little hot. For me, this means I have to look a little harder for the next stock to take my portfolio higher.
When the stock market turns turbulent, investors often seek out sectors with built-in resilience. Energy’s one such area, and companies that own and operate essential infrastructure — like wind farms — can offer a degree of stability that’s hard to find elsewhere.
Greencoat UK Wind‘s (LSE:UKW) a good example. As one of the UK’s largest owners of operational wind farms, its revenues are largely underpinned by long-term contracts and government-backed incentives, which can help smooth out the bumps when the wider economy slows.
A dividend giant
From a valuation perspective, Greencoat’s an interesting entity. It trades around 15 times forward earnings, a figure which falls to 8.4 times in 2026, if we believe analysts’ forecasts.
This, combined with a forward dividend yield of 8.9%, rising to 9.5% by 2027, will appeal to many an investor. However, we have to account for debt. The business has a net debt position of £1.8bn, and this could rise further in the coming year.
More generally, it’s a business that has made impressive strides in recent years. In fact, last year Greencoat generated enough clean electricity to power two million homes and offset more than two million tonnes of carbon dioxide.
Management’s also taken shareholder-friendly steps, including a £100m share buyback and a reduction in management fees, further strengthening the investment case.
Returning to valuation, the stock’s currently trading at a 22% discount to the company’s net asset value (NAV). This typically suggests investors would be getting £100 of assets for every £78 of stock they purchase.
Definitely not risk-free
However, no investment’s without risk. And the first relates to this NAV discount. Wind is unpredictable, and the value of Greencoat’s wind farms depends on long-term wind forecasts.
Last year, Greencoat’s wind farms generated 13% less electricity than budgeted, due to below-average wind speeds. In response, management’s revised its long-term wind speed assumptions downwards by 2.4%, acknowledging that climate change and natural variability are making wind patterns harder to predict.
It’s also true that wholesale electricity prices are falling. The price per megawatt-hour appears to be around £53 at the moment. Yes, it’s summer, but this is way down on where it was in 2022 and 2023.
And while a portion of the firm’s revenues are locked in through long-term contracts, the company’s still exposed to market prices for a meaningful share of its output.
£10,000 invested a year ago
Greencoat UK Wind’s shares are down 16% over the past 12 months. That means a £10,000 investment then would be worth £8,400 today. However, there would have been an 8% dividend yield to soften the blow.
Of course, past performance isn’t indicative of future performance. I’m wondering whether Greencoat could be a good idea today. It’s certainly worthy of further consideration.
