Down 22%, this FTSE stock offers a 9.3% dividend yield for investors

There are plenty of FTSE stocks offering impressive dividend yields right now. And one of the highest rewards currently on offer comes from Greencoat UK Wind (LSE:UKW) at 9.3%. The renewable energy trust hasn’t received much love from investors lately, with the share price taking a 22% hit over the last 12 months.

But despite what the downward trajectory implies, the underlying business continues to chug along nicely with a steady stream of cash flows and dividends. So is this a stock to consider buying today? Or is there a valid reason for caution?

The bull case

Let’s start with the fact that despite the high dividend yield, Greencoat actually generates more than enough cash flow to cover this expense. Admittedly, the dividend coverage ratio’s getting a bit tight at 1.3 times during 2024. That’s a notable drop compared to the group’s average of 1.8 since it was listed in 2013.

The cause is a combination of falling electricity prices and lower-than-expected wind speeds, highlighting a key risk of investing in a wind farm company. However, moving into 2025, management expects cash flows to climb, boosting dividend coverage in the process.

How? Apart from an anticipated increase in energy prices, the company’s busy expanding its wind farm portfolio to capitalise on the investment tailwinds being created by the new-ish UK government. Labour has outlined its ambitions to make the UK’s energy grid produce net zero emissions. And that includes the rapid expansion of wind power capacity across the country – terrific news for renewable energy firms like Greencoat.

The bear case

While the outlook for Greencoat’s operating environment looks promising, there are some more immediate issues that need addressing. The biggest one is arguably the firm’s impressive pile of debt, which currently stands at £1.76bn of loans & equivalents.

That is a slight improvement versus the £1.79bn reported in 2023. However, with interest rates remaining elevated, the interest expense surged from £58.8m in 2023 to £94.1m in 2024. Not only does this add pressure to the bottom line, but it also eats away at cash flow that could be used to reward shareholders.

Given the capital-intensive nature of building and acquiring renewable energy infrastructure, the use of debt is largely unavoidable. And management has placed debt-reduction among its top priorities. However, with gearing now sitting exceptionally close to its 40% limit at 39.7%, the dividend could be impacted in the short term if an emergency loan repayment is needed to stop this metric from tipping over the edge.

A stock worth buying?

Despite the stretched appearance of the balance sheet, Greencoat’s still a highly cash-generative enterprise with ample room for growth. There’s no denying that interest rate pressure is a notable threat to dividends. And we’ve already seen some of this materialise as the firm failed to hike shareholder payouts in 2024 for the first year since its IPO.

However, with interest rates slowly starting to fall, debt refinancing becomes a more attractive option to reduce this pressure. And subsequently, management has outlined its plans to resume its dividend hiking spree in 2025. Is this guaranteed? Of course not. However, with the shares trading at a forward price-to-earnings ratio of 12, it may be worth considering taking this risk, given the impressive dividend yield.

The post Down 22%, this FTSE stock offers a 9.3% dividend yield for investors appeared first on The Motley Fool UK.

Should you buy Greencoat Uk Wind now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

More reading

Zaven Boyrazian has positions in Greencoat Uk Wind Plc. The Motley Fool UK has recommended Greencoat Uk Wind Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.