Drax describes itself as a “renewable energy company engaged in renewable power generation, the production of sustainable biomass and the sale of renewable electricity to businesses“. It’s the largest renewable electricity generator in the UK and supplies 5% of the country’s energy needs. Its biggest asset is the Drax Power Station in North Yorkshire.

Over the years, I think it’s fair to say that the group’s operations have been controversial. In 2024, Ofgem found that the company had submitted inaccurate data on where its wood pellets came from. The head of the energy regulator said the group “accepted that it had weak procedures, controls and governance which resulted in inaccurate reporting of data about the forestry type and sawlog content being used“. The company made a voluntary £25m payment.

Today’s announcement that the Financial Conduct Authority (FCA) is investigating “certain historical statements” made in its 2021, 2022, and 2023 annual reports has clearly spooked investors.

The company will cooperate with the work of the FCA.

Never a good time

Whatever the findings, news like this is always unfortunate. Like a dark cloud, the investigation will hang over the company until it’s concluded.

But I think the group faces other challenges. Like most in the sector, it’s reliant on government subsidies. These are scheduled to end in 2027. What (if anything) replaces them is unclear at this stage.

And irrespective of where it’s sourced from, the burning of wood to produce electricity is controversial. Greenpeace has an article on its website with the headline: “10 reasons to stop subsidising Drax power station“. Published in November 2024, it claims that the company is the UK’s largest emitter of carbon.

Not for me

Even with today’s pullback in the share price, I don’t want to take a stake in the company.

I acknowledge that from a financial perspective, it’s doing okay. It’s profitable and a large proportion of its revenue is secured via contracts. And despite operating in a sector where capital expenditure can be significant, it has a relatively low level of debt. At 30 June, the group’s net debt was equal to its adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation).

Also, it plans to increase its 2025 dividend to 29p a share. On this basis, those investing today could enjoy a yield of 4.5%. Of course, there are never any guarantees when it comes to dividends.

But there’s too much uncertainty surrounding the group, which makes me uncomfortable. The FCA investigation is a concern but it’s the government’s approach to subsidies that worries me the most.

Although the group has agreed terms in principle regarding a possible agreement around future contracts for difference (from April 2027 to March 2031), it acknowledges that it’s non-binding. Drax says the “proposed agreement remains subject to Parliamentary procedures… and also anticipates a tightening of biomass sustainability requirements“.

There are too many moving parts for my liking.

The post The Drax Group share price tanks after FCA investigation launched appeared first on The Motley Fool UK.

Poised for a recovery?

FTSE 100 advertising group WPP (LSE: WPP) has faced some tough times over the last few years.

A global slowdown in spending on advertising and marketing has hit profits hard in recent years. Tariffs could also hit some of WPP’s larger customers.

WPP’s share price has now fallen by nearly 50% in three years. But advertising has always been a cyclical business, and I think a recovery is likely at some point.

In the meantime, the firm’s shares are starting to look unusually cheap to me. Broker forecasts price WPP shares on less than eight times forecast earnings, with a useful 6% dividend yield.

Cash generation has remained healthy, and the dividend still looks affordable to me as long as debt levels remain under control.

My main concern is probably that the growing importance of AI and online advertising could make it hard for WPP to return to past levels of growth and profitability. The company has expanded its digital capabilities in recent years, but investors are still waiting for a return to growth.

Buying contrarian or unloved shares requires investors to go against the trend. WPP is one stock where I think this is worth considering, especially for investors who are looking for income.

A renewable power play

North Yorkshire-based Drax (LSE: DRX) is best known as the owner of the UK’s largest power station, providing 5% of the nation’s electricity.

This used to be a coal-fired business, but the company’s big burners now rely on biomass, or wood pellets. This fuel is officially classified as renewable and attracts government subsidies, boosting Drax’s profits.

The obvious risk is that government policy on biomass support is not exactly predictable. Earlier this year, Drax agreed a new deal with the government to support its operations between 2027 and 2031.

This should allow it to keep operating when its current subsidy deal expires. But the new deal is said to be significantly less generous than the old one, so future earnings from biomass generation could fall.

Drax CEO Will Gardiner is not blind to this risk. He’s been adding other types of electricity generation to the group’s portfolio. The company’s assets now include hydroelectric power and battery storage.

Three new gas-powered turbines are also expected to start operation later this year, providing up to 900MW of additional capacity. They’ll be used to help keep the grid balanced alongside more variable renewable suppliers, with contracts already in place “worth over £250 million”.

Uncertainty over future earnings potential is weighting on Drax’s share price. Broker forecasts suggest profits could fall by 40% in 2026, compared to 2025. However, even these downbeat forecasts leave Drax trading on a modest P/E of 9, with a 5% dividend yield.

My guess is that the UK may continue to need Drax’s power generation even after 2031. If profits stabilise at 2026 levels, I think the shares could be too cheap right now.

For investors seeking opportunities among utility stocks, I think Drax is worth considering.

The post 2 cheap UK dividend shares to consider buying in May appeared first on The Motley Fool UK.

And with a share buyback programme now in full swing, management looks to be signalling confidence. Let’s take a closer look.

A notable transition

The firm’s transition from coal to biomass and hydroelectric power generation aligns well with the UK’s ambitious net-zero carbon emissions targets. This strategic repositioning not only addresses environmental concerns, but also positions the company for long-term growth in the renewable energy sector.

The commitment to sustainability extends beyond its core operations. In a dramatic overhaul from 50 years of operating the North Yorkshire coal-fired power station, the business is now actively exploring carbon capture and storage technologies. This emerging area potentially opens up new revenue streams and further enhancing its green credentials.

From a valuation perspective, the shares look pretty appealing. The company trades at a price-to-earnings (P/E) ratio of just 3.8 times, significantly below the FTSE 250 index average of about 14 times. It’s possible this discrepancy’s due to uncertainty in the sector, but with the shares up 21% in 2024 to date, it’s also possible that the market may be undervaluing future growth prospects.

Moreover, the company offers a respectable dividend yield of 3.56%. With a conservative payout ratio of 14%, there’s ample room for dividend growth, assuming the company’s earnings trajectory remains positive.

Share buybacks

The firm’s ongoing share buyback programme adds another layer of appeal to the investment case. The company recently purchased 145,000 shares at an average price of 647.34p per share, part of a larger £300m buyback initiative announced earlier this year.

This move serves multiple purposes. It demonstrates management’s confidence in the company’s value and future prospects. By reducing the number of outstanding shares, it can potentially boost earnings per share and shareholder value. Investors often view buyback programmes as a positive signal, indicating the company believes shares are undervalued at current levels.

A discounted cash flow (DCF) calculation backs this up, with an estimate of fair value about 57% higher than the current share price.

Risks remain

While the investment case is fairly compelling, it’s crucial to consider the associated risks. This is true for any company in transition, but especially in such a cyclical and uncertain sector.

The firm carries a significant debt burden of £1.56bn. While not uncommon in the capital-intensive energy sector, this level of debt requires careful monitoring. Analyst estimates suggest an average earnings decline of 21.5% a year for the next three years. This projected downturn could be attributed to various factors, including potential regulatory changes or fluctuations in energy prices.

As a key player in the UK’s energy transition, the business is also subject to changing government policies and regulations, which could impact operations and profitability.

To me, the company’s low valuation, solid dividend yield, and ongoing share buybacks offer multiple avenues for potential returns. Management’s bold transition to renewable energy, coupled with its shareholder-focused initiatives, makes it a noteworthy contender for investors looking to capitalise on the shift towards sustainable power generation.

I’ll be buying some shares at the next opportunity.

The post With share buybacks under way, I love the look of this FTSE 250 company appeared first on The Motley Fool UK.

Growth stocks can lose momentum. This results in the share price falling, leaving just two options: hope for a recovery or sell the position. Likewise, a value investment may take years before the market capitalisation catches up to its true value. This is why income holdings can be of great benefit to my portfolio. Regardless of the share price, dividends should continue to be paid each month or quarter.

What I’m looking for

Despite how simple this strategy may appear, it involves looking at several factors to find a consistent income-generating holding. I’m looking for simple, high-quality companies whose business models aren’t difficult to understand and who I can trust to pay a dividend continually. For me, a high-quality business will generate plenty of cash flow, have strong earnings growth, and sensible profit margins.

Of course, it’s essential not to forget the dividend itself. For this reason, I have a few requirements when it comes to the yield being offered. I want to see a dividend that has been paid and grown consistently for many years. This track record is vital, as I want to be able to rely on this company’s dividend for many years.

My latest find

A  prime example of what I’m looking for is Drax Group (LSE: DRX). It is a UK-based company focused on renewable energy generation. It has experienced impressive share price growth over the last two years, growing over 61% in 2021. However, it is now down almost 7% this year and over 32% from its peak at the beginning of 2022. Despite this, the price-to-earnings (P/E) ratio is currently 25.5, although it is forecast to reach just 6.9 by next year.

The underlying fundamentals are also strong, with good levels of free cash generation and reasonable profit margins. Additionally, turnover is forecast to grow by 26% next year, and earnings per share (EPS) is expected to increase by 267%. These impressive forecasts support the idea the current dividend is secure and likely to grow further.

The current yield of 3.3% has been paid consistently for the last 16 years and has grown for the previous five. The dividend cover ratio of over one suggests that this level can be paid comfortably with current EPS. The dividend is also forecast to grow by over 11% next year, reaching 3.8%. This new level can still be comfortably covered by EPS, giving a dividend cover forecast of just under four.

My conclusion

It is essential to note that the current share price level is relatively high, so if the expected EPS and turnover growth aren’t achieved, the current price-to-earnings ratio could make the stock overvalued. Also, the current debt level is almost 70% of market capitalisation, so I want to keep an eye on these.

Nevertheless, this is an excellent opportunity to access a consistent dividend yield. I will add the company to my portfolio once I get the necessary funds.

The post I’d buy this share for monthly passive income in 2023 appeared first on The Motley Fool UK.