Biden bounce! 1 cheap FTSE 250 stock I’d buy today

Large reforms to the US energy sector are expected under Biden. Zaven analyses a cheap FTSE 250 energy stock that is thriving under similar laws in the UK.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

US President-elect Joe Biden has announced many reforms to the energy sector. These kinds of reforms already exist in the UK, and this cheap FTSE 250 stock has been a significant beneficiary. 

The UK became the first major economy to pass a net-zero emissions law in 2019. This requires various industrial sector companies to eliminate all greenhouse gas emissions by 2050. Contrary to popular belief, the transition to net-zero emissions appears to be progressing well. In 2018, UK emissions were 44% lower than levels in 1990, primarily due to innovations in the energy sector.

Today renewable energy technologies generate approximately 46% of electricity. Wind farms generate 33% of that. 

A renewable opportunity in the FTSE 250?

Greencoat UK Wind (LSE:UKW) is an investment trust that specialises in UK wind farms. It allows investors to indirectly own wind turbines and profit from the electricity they generate.

The business is quite simple. Led by the board of directors, the trust identifies critical wind assets around the country and adds them to the portfolio.

Greencoat sells the energy directly to the national grid. It invests profits into future investments and pays them out as dividends to shareholders. Running wind farms is not a particularly capital intensive operation. Excluding maintenance costs, the remaining expenses are negligible, allowing for an average operating profit margin of over 80%. This level of profitability is partly due to only 17% of owned wind farms being located off-shore. These are typically more expensive to maintain. 

Management has also enacted financial restrictions that shield shareholders from unnecessary risk. For example, the firm cannot have more than 40% debt as part of the capital structure.

Cheap FTSE 250 Stock Biden Bounce

Source: Greencoat

The financials

Greencoat’s 2019 income statement reveals an over 60% decline in revenues from the prior year. This decline was a result of multiple faults in several farms that were taken offline for repairs.

In the most recent interim report, the company announced it had fixed these faults. Revenue for the first half of 2020 currently stands at £135m with an estimated final revenue of £270m. This represents a 200% and 16% increase in revenue compared to 2019 and 2018, respectively. While this is undoubtedly good news, it does reveal how much damage a few faults can have on the overall performance of the business – an ongoing risk.

Lack of price power is another unavoidable issue. Approximately 50% of all revenues are exposed to the floating power price. With legislation capping energy prices, there is little room for electrical price appreciation.

The bottom line

Joe Biden is set to be the 46th US president, and the market is enjoying large returns from the ‘Biden Bounce’. The additional pressure on the global energy sector to transition to renewable energy may result in new innovations in wind farm technology.

Despite its limitations, the FTSE 250 stock has become the UK’s leader in wind generation. The dividend remains linked to retail price index inflation and at current prices represents a 5.3% yield that has been steadily increasing by 4% each year. Mixing low reliance on debt, continuous cash flow, a handsome dividend, and a very windy country, creates a recipe for success in my eyes.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian does not own shares in Greencoat UK Wind. The Motley Fool UK has recommended Greencoat UK Wind. 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.

More on Investing Articles

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Down 44% in 2 months! Is this FTSE 250 green energy pioneer priced too cheaply?

After a sharp tumble in recent months, this FTSE 250 company with a growing order book is almost 90% below…

Read more »

Investing Articles

Investing a £20k Stocks and Shares ISA in this high-yielder might give me a £2,000 annual income

Harvey Jones is now wondering whether to pour his entire Stocks and Shares ISA allowance into a single FTSE 100…

Read more »

Investing Articles

Saving £20k in an ISA? Here’s how I’m aiming to turn that into a stunning £2,035 monthly passive income

Harvey Jones is keen to build a high and rising passive income by investing in a balanced spread of top…

Read more »

Investing Articles

How I’ll aim to turn an empty ISA into a £100k nest egg buying cheap shares in 2025

Christopher Ruane explains how he thinks taking a long-term approach to buying cheap shares and holding them could help him…

Read more »

Investing Articles

I love my Legal & General shares even more after today’s exciting update

Harvey Jones had high hopes for Legal & General shares when he bought them last year. So far he's got…

Read more »

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Is easyJet’s share price set to soar after strong 2024 results and upbeat business projections?

After tough years for the airline sector, easyJet’s share price has bounced back and its prospects look good. But how…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Is BP’s 6.7% dividend yield good value after the recent share price fall?

Despite the fluctuating oil price and BP's volatile shares, City analysts predict strong ongoing annual dividend payments ahead.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Up 42% from their 12-month low, is it time for me to buy this much-fancied FTSE growth stock after a 2% dip?

This FTSE 100 distribution firm achieved a lot in the past year and has good earnings growth prospects, but is…

Read more »