The investment industry is obsessed with forecasts. Even though no human being has ever been able to accurately predict the outcome of any event on a consistent basis, share prices are hugely influenced by guesstimates.
For example, a company that makes a £500bn profit in a single financial year could still see its share price slump if investors had expected the figure to be £550bn. By contrast, a struggling firm’s shares can soar if its losses were not quite as bad as the stock market had anticipated.
Forecasts, of course, extend to other areas such as the rate of inflation and interest rate changes. Annual inflation, for instance, dropped by 1.4 percentage points to 8.7pc in April. Although this was its lowest level for 13 months, it was still 0.5 percentage points higher than economists were expecting.
And because core inflation, which does not include food and energy price changes, increased to a 31-year high of 6.8pc in April, investors are now forecasting that interest rates will reach 5.5pc – or even higher – over the coming months.
In Questor’s view, investors should not rely on the accuracy of any forecast when deciding how to apportion their capital. Instead, they should seek to buy companies that have sound fundamentals when their share price offers a wide margin of safety.
Indeed, no investor expected inflation to rise from 2pc to a 41-year high of 11.1pc, which was reached in October last year, when Greencoat UK Wind was added to this column’s Wealth Preserver portfolio in August 2021. The wind farm operator’s shares have thus far risen by 8pc and have yielded dividends that amount to 11pc of the initial purchase price.
Importantly, the company has met its central aim of increasing dividends per share at the same rate as RPI inflation. In 2022, for example, dividends rose by an RPI-equalling 7.5pc.
In 2023, the company’s first quarterly dividend payout was increased by 13.5pc, which equals the rate of RPI inflation, so that annualised shareholder payouts are 8.76p per share. With a historical dividend yield of 5.3pc, the stock’s income return is 1.5 percentage points greater than that of the FTSE 100.
Rampant inflation has boosted the financial performance of the company because of the index-linked nature of its cash flows. This contributed to net cash generation of £560m in the 2022 financial year, which covered dividend payments over three times.
It also provided capital to make further acquisitions to grow the company’s asset base. And with gearing amounting to 31pc, versus a limit of 40pc, Greencoat UK Wind has sufficient financial resources to build a larger portfolio of UK wind farm assets as the push towards net zero continues.
The company has also met its second goal of preserving the capital value of its portfolio in real terms. Its net asset value (NAV) per share rose from 133.5p to 167.1p last year, for example.
This means that it currently trades at a 12pc discount to NAV, although the value of its portfolio is based on assumptions regarding the future rate of inflation, interest rate changes and several other inputs that are impossible to accurately predict.
Clearly, there are several risks ahead for the company and the wider sector. Among them is the potential for a continued decline in the popularity of environmental, social and governance (ESG) investments after UK investors withdrew £304m from ESG equity funds last month.
The returns from wind farms could also decline should gas prices fall, since they usually determine power prices, while a Labour government may implement tax changes, including a windfall tax, on energy producers.
However, all of these threats are known unknowns. Investors ultimately have no way of determining whether they will take place, or to what extent they will affect Greencoat UK Wind’s share price if they occur.
In Questor’s view, the company remains a worthwhile holding for income-seeking investors and individuals who are seeking to maintain, or even grow, the real-terms value of their portfolio.
Its high dividend yield, track record of raising shareholder payouts at the same rate as RPI inflation and the long-term growth potential of renewables as the UK seeks net zero status mean the stock continues to offer a favourable risk/reward ratio.
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