A couple of FTSE 250 investment funds in a similar business both have juicy yields at the moment. One offers just below 9%, while the other is even higher.
Could those yields last – and ought I to buy the shares in question for my portfolio?
Making money from the sun
The 8.9% yielder is Bluefield Solar Income Fund (LSE: BSIF), while 9.3% is on offer at Foresight Solar Fund (LSE: FSFL).
Over the past five years, however, those two shares’ prices have fallen 25% and 21%, respectively.
That partly explains the high yields. Another part of the explanation has been annual increases in the dividend per share during that timeframe.
Those annual increases have continued at Foresight Solar Fund. This year, however, has seen Bluefield Solar Income Fund hold its dividends per share steady for the payments declared so far.
So, given the high yield and also sizeable discounts to net asset value implied by the current share prices (Foresight’s discount is 22% and Bluefield Solar’s is 20%), what is going on here? What might it signal about future dividend streams?
Variable financial performance
Bluefield has seen revenues grow steadily over the past five years. But income has moved around significantly. Last year, the fund actually made a loss of £10m.
While the fund has locked in the price of some of its power sales, the majority of its output is not sold at a pre-agreed rate. This means that there is a risk weaker energy prices could hurt earnings.
The flip side of that is also true, though: higher energy selling prices could boost profits.
Meanwhile, Foresight swung back to a profit last year after making a loss the year before. Its revenues have also moved around in recent years.
Challenges face the sector
Something I think these two FTSE 250 funds have in common is that they are in a sector with fairly unpredictable economics.
In March, Foresight pointed to “poor weather and persistent macroeconomic headwinds in the UK” as helping to explain why listed renewables companies may be trading at a discount to net asset value. It continued that “meaningful returns of capital will inevitably lead to a reduction in the listed renewables asset class, and we are likely to see examples of successful consolidation”.
In other words, there may be mergers or takeovers in the sector. Given that some solar companies are trading at a deep discount to net asset value, such consolidation would not necessarily be value-creating for long-term shareholders.
The economics of the sector have proven challenging so far. A shift in policy in recent years means that solar energy may not have as large a role in long-term UK power generation as some operators once hoped. That raises the question of how sustainable the current dividend yields will be in years to come. If energy prices weaken substantially, I see a risk that the dividends will be cut.
So, I see the high yields of both of these shares as a warning sign suggesting that the City is concerned about the risks involved in investing in the sector. Even a high yield can be unattractive if a share price falls enough.
Given that context, I do not plan to add either share to my portfolio.
