Specialist solar energy and energy storage fund NextEnergy Solar (NESN) is one the biggest yielders in the FTSE 350 index offering a prospective yield of nearly 12%.
Often a double-digit yield is a warning signal of a looming dividend cut but there are reasons to think that is not the case here.
Since listing on the market in 2014, the company has paid out a cumulative £395 million in dividends, an amount almost equivalent to the company’s current market capitalisation.
Over the same period the fund has delivered a total shareholder return above the FTSE All-Share total return index.
The company has met its target dividend for 11 straight years and recently (16 June) declared a target dividend for the year to the end of March 2026 of 8.43p per share, up 1% and forecast to be covered within a range of 1.1 times to 1.3 times.
Despite a successful capital recycling programme which has demonstrated consistent asset sales at prices above NAV (net asset value), as well as a share repurchase programme, the shares trade on an unwarranted 26.4% discount to NAV.
As Shares argued in a recent article on the attractions of infrastructure and renewables sector, headwinds facing the sector are dissipating while ‘self-help’ measures and increasing corporate activity could work to unlock the value on offer.
Just to give an idea of the value on offer and potential shareholder return for NextEnergy, let’s conservatively assume the dividend and NAV do not rise over the next five years, but the discount to NAV narrows to zero.
Merely compounding the 12.6% dividend each year gives prospective shareholders an 81% return (1.126 x 1.126 x 1.126 x 1.126 x 1.126). If the discount disappears in year five, that adds a further 26.4%, taking the total price return to 228% or a high teens percentage annualised return.
It is important to point out this an illustration only rather than a projection, but it does highlight the value of compounding dividends and the potential value on offer for patient, disciplined investors.
SELF-HELP MEASURES
The company has taken actions to narrow the discount along with other companies in the sector. The board has also indicated it is open to all strategic options to unlock value for shareholders.
Before looking at the actions taken, it might be useful to sketch a picture of the company’s assets.
NESF operates a diversified portfolio of around 100 assets and most of the cash flows from them are inflation-linked through UK government subsidies.
The investment manager of the trust is one of the world’s biggest specialist solar investors with around £3.9 billion of assets under management worldwide.
The portfolio has a total installed capacity of 937MW (megawatts) with a remaining weighted average life of just under 25 years. Over the year to March 2025, the assets generated 830GWh (gigawatt hours), which fell around 5% short of budget, mainly due to adverse weather and outages.
Three out of the four phases of the company’s capital recycling programme have been completed, raising £72.5 million and leading to an uplift in NAV of 2.76p per share in the year to 31 March.
The company consolidated its revolving credit facilities into one £205 million facility, at a reduced cost or spread over short term interest rates. Total debt stands at £490.6 million, representing gearing of 48.4%. This relatively high level of borrowing is an area of risk for prospective investors to weigh.
The £20 million share repurchase programme announced in June 2024 is 75% complete with roughly 15 million shares purchased at an average price of 74p, creating an NAV uplift of 0.5p per share.
The trust has an ongoing charge of 1.17% and the board are in discussions with the manager to reduce fees.
In summary, we believe the shares are attractively valued and do not reflect the company’s track record of a consistently growing, fully covered dividend. There are early signs that the wide discounts in the sector are attracting investor interest amid increasing corporate activity.
COMPOUNDING DIVIDENDS
Reinvesting dividends can allow you to reap the full benefits of compounding. The great thing about NextEnergy is that pays its annual targeted dividend quarterly, in the middle of February, May, August and November, each year.
The sooner investors receive each cash dividend, the sooner it can be used to buy more shares in the company. Due to the effects of compounding, this means the achievable yield is even higher than the headline 12% based on the annual dividend.
The calculation used is to divide the 12% annual yield into four quarters and then multiply them. (1.03 x 1.03 x 1.03 x 1.03) This equates to a yield of roughly 12.6%.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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