With climate change being one of the most severe issues facing the world today, finding alternative sources of energy has become extremely important. This means that I’m very interested in several renewable energy stocks, which should see significant demand for the foreseeable future. NextEnergy Solar Fund (LSE: NESF) is my personal favourite.
Recent trading update
A few weeks ago, NESF released a trading update up to the end of September. Here it announced that its net asset value (NAV) per share had increased to 103.1p. This is a rise of nearly 8% since March 2021. As the share price currently sits at 100p, this means that the fund trades at less than its NAV. This is fairly rare for renewable energy stocks, potentially indicating that NESF is too cheap.
The group also added an extra five operating solar assets, taking the total to 99. This means that the total installed capacity has reached 895MW, a rise of nearly 10% since March. Hopefully, this will allow the fund to increase profits.
The future also looks fairly positive. Indeed, the Chairman of NESF, Kevin Lyon, has pointed to factors such as “unprecedented high power prices in the UK, global gas shortages, and the recent UN climate change conference” to show that the switch to solar energy is required. As a result, I view NESF as a long-term stock.
The dividend is also a major positive for the group and this year it has been raised by 1.5% to 7.16p per share. This means that it currently yields over 7%, far higher than the majority of other UK stocks. It’s also higher than other large dividend renewable energy stocks, such as Greencoat UK Wind, which yields around 5%.
But I do have some concerns about the dividend. Indeed, the current cash dividend cover is just 1, compared to 1.2 in the same period last year. This means that if profits fall, the dividend is very susceptible to being cut. It also means that there’s no money left for reinvestment into the company.
Why have I bought this renewable energy stock?
As mentioned before, I feel that company profits will be able to increase, especially because of the increasing necessity for solar power. Therefore, I hope that the dividend will stay at its current level, and there may even be scope for it to rise.
Recently, it also diversified into the energy storage sector through a £100m joint venture with the battery specialist Eelpower. This adds a new source of profits for the company, another factor that will hopefully support the large dividend.
As such, I bought shares in NESF as a solid income stock, which is also slightly undervalued, especially in comparison to its NAV. I may buy more shares at its current price.
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Stuart Blair owns shares in NextEnergy Solar Fund. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.