A few years ago, when long-term income giants BP and Shell were being hammered, any dividend stock aimed at renewable energy could hardly put a foot wrong.Today, things have flipped. With climate targets fading daily, big oil is making a comeback. And the money is deserting the alternative energy business.
At least, that’s the way it looks when I check the dividend yields on some FTSE 250 investment companies. Today, I’m going to look at the biggest yield of the lot, NextEnergy Solar Fund (LSE: NESF).
Here’s how broker forecasts see the next three years:
Forecasts202520262027Dividend yield13.1%13.3%13.6%(Sources: DividendData, MarketScreener, Yahoo)Those yields from NextEnergy Solar look phenomenal, but there’s a downside. They’re so high partly because the share price has slumped 30% year to date in 2024.
That shows weak investor confidence, and I can see several reasons.
The company develops and runs solar energy facilities in the UK and Europe. It’s profitable, although it does enjoy government support. What might happen if and when that ends? That’s a risk.
Also, it’s a business that takes a lot of costly investment. And NextEnergy Solar has sizeable debt to service.
With November’s interim figures, the company reported total gearing of 48.2%. Its investments are funded 48.2% by debt, which I rate as far from ideal.
Still, the update told us it had “refinanced all revolving credit facilities at attractive margins demonstrating the appetite of the company’s banking partners to provide debt to the company at attractive terms.“
At interim time, the company told us it had achieved dividend cover of 1.5 times for the first six months of the year. It also spoke of “target dividend cover of 1.1x-1.3x for the financial year ending 31 March 2025,” stressing its high yields.
The board aims to “deliver reliable returns to shareholders through well-covered quarterly dividends derived from strong cash flows.“
These ambitions are fine. But I get a bit twitchy when I see a company focusing on its dividends and talking about yields. It’s amost as if it’s trying to talk up its share price.
And I actually don’t rate cover of 1.1 times to 1.3 times as all that great, especially not if it’s falling. I see a potential threat to the dividend.
On another valuation measure, NextEnergy Solar shares might look super cheap.
The company put its net asset value (NAV) per ordinary share at 97.8p. That’s down from 104.7p at 31 March, but still way above the share price.
At the time of writing, NextEnergy shares are trading at 64.5p. That’s a 34% discount to NAV, which is huge. So, what’s my bottom line?
I love the dividend yields, but I’m unsure of their sustainability. The debt looks bad, but I’m optimistic about future finance. I like the discount, but I’m unsure of the true asset value.
This could be a great long-term investment. But there’s short-term risk, including possible financial pressure. I need to dig deeper
