For my personal portfolio, I am looking for dividend stocks with strong tailwinds. Renewable energy stocks fit the bill. Sustainable energy sources are taking market share from fossil fuels. Many countries across the globe are committed to reducing the greenhouse gas emissions. They want to move towards a more sustainable energy mix. This has been evidenced by the signing of the Paris Agreement. I bought this renewable energy dividend stock as it pays a high dividend that has the potential to grow further. Also, the business benefits from the shift towards sustainable energy sources.
The stock I bought is called Drax Group PLC.
The Company
Drax Group PLC is a renewable energy stock that is very well positioned in the industry. The company has gone through a major turnaround in the last half a decade. Drax was once one of the biggest polluters in Europe as it burned coal to produce energy. The company has shifted its business around and is now one of the biggest renewable energy operators in the UK. It is also aiming to become the first company worldwide to be carbon negative by 2030.
Thesis in 2020
Drax managed to shift its business around by converting its coal-powered power plants to use biomass instead of coal. Drax is also producing its on biomass in the form of wood pellets to burn in the plants. The company has converted 4 out of the 6 coal power units, with the remaining 2 set to close by 2024. They will be replaced with gas-powered power units. Drax has a diverse mix of power generating assets. They include hydro, pumped storage and gas-fired generation assets. They diversified the asset base further by completing the acquisition of ScottishPower assets from Iberdrola. The Bioenergy Carbon Capture And Storage project also has huge potential. This project actually prevents carbon from entering the atmosphere, instead it stores it in storage cylinders.
Source: Drax Group Earnings Report
Dividend
The dividend yields 5.3% at current prices and the interim dividend was raised 12.5% in H1 2019. The dividend has been very volatile in the last few years. That was largely due to the company needing to fund the restructuring and the costs for acquiring the Scottish Hydro assets from Iberdrola. Going forward the dividend payments should stabilise and grow over time. The management has stated that its intention is to pay ” Sustainable and growing dividends”. The company also commenced a 50 million pound share buyback programme in April of last year.
Valuation
Now that the Scottish Hydro assets are incorporated into the company, we can have a clearer indication of the earnings going forward. Drax Group PLC is trading at around 7.6 estimated 2020 earnings. For a company that pays a 5%+ dividend and makes up such a large percentage of renewable energy mix in the UK, it offers compelling value. Especially when taking into account the sector tailwinds.
Risks
I see the main risk for Drax Group PLC coming from government policy changes and regulations. Currently the company relies on the government subsidies in the UK. It would suffer significantly if the political winds change and the emission targets would be altered or the subsidies removed. As the last 2 remaining coal plants will need to be converted to use biomass as well, so execution risk remains. There is also opposition to its gas plant project. It has been halted pending the outcome of a court case. Environmentalist from Biofuelwatch are also opposed to Drax’s biomass burning plants and its gas power plant projects. They have started a petition against it. Foreign investors are also subject to currency risk.
Summary
Drax Group PLC is a company that has changed course and is now a major player in the UK renewable energy space. With a diversified portfolio of power assets that fund a high, sustainable dividend and trading at a favourable valuation, I find it a very interesting opportunity. I opened a position this month and will monitor this stock with a possibility of increasing my position further.
Disclaimer: I own shares in Drax Group PLC. This is not a recommendation to buy or sell any shares. You can lose a part of or all your invested capital.
