Investing in UK shares right now may seem absurd. After all, with inflation on the rise due to the cost-of-living crisis, the stock market hasn’t exactly been a stellar performer lately. And several once-thriving stocks are now in the gutter.
But as Warren Buffett always says: “Be greedy when others are fearful”. With that in mind, I’ve spotted one business that actually looks primed to thrive, even in a recessionary environment. That’s why I recently bought £1,000 worth of shares in my SIPP at the start of August. And it continues to look like a bargain today.
One of the best UK shares to buy now?
At the heart of our current economic turmoil are skyrocketing energy bills. And the situation looks like it’s about to get worse as Ofgem, the UK’s energy regulator, prepares to raise price caps by another 80% in October.
How we got into this predicament is a bit of a complicated mess. But in oversimplified terms, it comes after decades of winding down natural gas production in favour of importing it from Russia as we transition to renewables. Unfortunately, this transition hasn’t been fast enough. And since Russia decided to invade Ukraine, the UK, along with the rest of Europe, isn’t exactly keen on importing fossil fuels from Russia anymore.
Following this dire situation, investments in wind power have started to accelerate. And that’s created quite the favourable environment for Greencoat UK Wind (LSE:UKW). The company owns a vast portfolio of wind farms across the country. It generates clean electricity and sells it to the national grid, returning the profits to shareholders in a 4.6% dividend yield.
Being a largely fixed-cost operation, the rise in electricity prices has translated almost entirely into profit. In fact, looking at the latest results, operating margins stand at one of the highest levels I’ve ever seen – 96%!
This extraordinary cash flow has provided immense flexibility for reinvestment and opened the flood gates for larger shareholder payouts. And since managerial policy raises dividends in line with inflation, the passive income stream looks highly attractive in my eyes. That’s why I think these could be some of the best UK shares to buy now.
Taking a step back
As impressive as the group’s latest performance has been, it’s worth remembering that the energy sector is notoriously cyclical. Eventually, energy prices will start to tumble. That will likely cause current profit margins to suffer, pulling down earnings and, in turn, dividends. Needless to say, this eventual scenario will likely drag these UK shares in the wrong direction.
Furthermore, with management paying out such a large portion of cash flows to shareholders, the group has become reliant on debt financing to fuel the acquisitions of new wind farms. The last decade has enjoyed the benefits of near-0% interest rates. But those days look like they’re over.
Consequently, the £950m of long-term debt & equivalents on the balance sheet is less than desirable. Management appears to be aware and is already tackling this issue since this balance is down from £1.1bn in 2020. But it’s something I feel is worth keeping an eye on as the Bank of England raises interest rates.
Regardless, I think surging revenue, insane profit margins, and an inflation-linked dividend make the risks well worth the potential reward.
