The FTSE 250’s predominantly known for its small- and mid-cap growth opportunities, but the UK’s second-largest index is also filled with ample income opportunities. And among them, Foresight Solar Fund (LSE:FSFL) currently stands out, thanks to the stock’s impressive 10.3% yield.
Like many renewable energy infrastructure funds, the last couple of years haven’t been kind to Foresight. The high-cost nature of its assets requires a lot of debt to acquire making the new higher interest rate environment less than ideal.
Subsequently, the business has seen its market-cap shrink by almost 35% since the start of 2023. Yet, shareholder dividends have kept flowing and growing. So is this a bargain in disguise for long-term-focused income investors?
A sustainable double-digit yield?
As a quick reminder, Foresight Solar owns a collection of solar and battery storage assets across the UK, Spain, and Australia. However, management’s currently in the process of divesting the latter.
The business model’s simple. Foresight generates clean electricity, sells it to energy suppliers, and uses the cash flow to service its debts, with the rest largely passed along to shareholders.
Given electricity is in constant demand and prices move roughly in line with inflation, Foresight’s dividend has done the same, allowing shareholders to earn what’s effectively an inflation-linked income stream.
The continuous stream of cash flow with relatively high margins, thanks to low fixed costs, are welcome traits for a dividend-paying investment. And on the surface, owning shares of Foresight Solar seems like a no-brainer. So why’s the stock price moving in the opposite direction to the dividend?
Risk of renewables
From an operational standpoint, Foresight’s almost entirely at the mercy of the weather, which hasn’t been great lately. In fact, the UK Department for Energy Security and Net Zero has revealed that 2024 had the lowest number of sun hours since Foresight’s IPO.
For reference, the average number of sun hours a day over the last 20 years sits at 4.4. But in 2024, Britons only enjoyed 3.8 hours, down from 4.3 in 2023 which, in turn, was down from 4.9 in 2022.
Looking over to the financials, the burden of rising interest rates is also causing some concern. For the most part, management’s successfully hedged against the risk of higher interest expenses by entering interest rate swap contracts.
However, when combining higher interest rates with less sun, Foresight’s asset portfoli’s losing market value, resulting in its gross asset value (GAV) tumbling from £1.3bn at the start of 2023 to £1.05bn at the end of 2024. With that in mind, it’s not surprising the stock price has subsequently fallen by a similar amount over the same period.
Time to buy?
All things considered, Foresight Solar looks like a promising candidate for a long-term income portfolio today. The risk of bad weather is something investors will have to consider. However, from a financial standpoint, management seems to be positioning the firm well to withstand the less-than-favourable macroeconomic environment.
My portfolio already has sufficient exposure to renewables, so this isn’t a stock I intend on buying right now. However, for investors seeking exposure to this sector and happy to wait for a recovery, Foresight may be worth a closer look.
