Interactive Investor

Ian Cowie: this trust is lagging rivals, but has a big dividend

14th July 2022 10:31

Ian Cowie from interactive investor

One of our columnist’s renewable energy choices is in the red since he first invested, but its 6.6% yield is a key attraction.  

You might think it is impossible to miss with renewable energy investment trusts, boosted by government ‘net zero’ targets, but valuations still matter and one of my big bets on solar power is under a cloud. Even so, electrifying income is a ray of sunshine and one reason to remain cheerful.

Last week my third dividend payment this year arrived from sterling-denominated shares in US Solar Fund (LSE:USF). This investment trust with total assets of $317 million (£266 million) is yielding 6.6% according to independent statisticians Morningstar via the Association of Investment Companies (AIC).

My ISA has received a tax-free four-figure cash income from USFP so far in 2022. That helps offset the capital loss incurred since I first invested, paying 79p per share in November 2020, for stock that costs 74p now.

Setting aside or ignoring a couple of tiddler trusts with assets of less £100 million, that leaves USFP’s performance at the bottom of the AIC ‘Renewable Energy Infrastructure’ sector over the last year, with a negative ‘return’ of -8%. That is dismal compared to a sector average of 15% positive returns.

USFP looks even worse by contrast with the batteries specialist and sector leader, Gresham House Energy Storage (LSE:GRID), which has shot the lights out with a total return of 43% over the last year, including a dividend yield of 4.5%, according to Morningstar via the AIC. Neither GRID nor USFP has a five-year track record yet.

Both the second and third-best performers in this sector over the last year do have five-year records. JLEN Environmental Assets (LSE:JLEN) and Foresight Solar LSE:FSFL) delivered 32% over the shorter period and 58% over the longer term; or 25% and 41% respectively. Meanwhile JLEN yields 5.8% and FSFL pays 6.1% dividend income.

So I asked USFP fund manager, Liam Thomas, why anyone might want to invest in this portfolio of solar farms spread across California, North Carolina, Oregon and Utah. He told me: “USFP is well-positioned to take advantage of key macro trends that we don’t expect to change any time soon.

“In supporting the world’s most energy-hungry nation to move to clean energy, solar is the most cost-competitive source of new electricity generation in many parts of the United States. Estimates suggest solar could reach 40% of US electricity generation by 2035.

“Last year, global corporations bought a record 31.1 gigawatts of clean energy, up nearly 24% from the 2020 total. Last month, the Biden administration announced a two-year pause on imposing any new tariffs on the solar industry to support development.”

However, it is notable that solar panels made in China are excluded from the tax amnesty, which is restricted to plant and equipment imported from Cambodia, Malaysia, Thailand and Vietnam.

Even so, the analyst, Iain Scouller, at investment trust analyst Stifel, was inclined to look on the bright side. He said: “The American solar industry received a boost when president Joe Biden removed tariffs on imports of solar panel components from four Asian countries for a 24-month period.

“We think action that helps increase the supply and lowers the cost of components for the solar industry is helpful, amid concerns about America being able to generate enough electricity to meet consumer demand.

“In recent years, the vast majority of solar modules installed in the United States were imported, with those from Southeast Asia making up approximately three-quarters of imported modules in 2020. The US government says it is now on track to triple domestic solar manufacturing capacity by 2024.”

Another positive factor was pointed out by Ewan Lovett-Turner at Numis, another investment trust analyst. He said: “The assumed useful life for 30 of USFP’s 42 solar farm assets has been  extended to 40 years, after previously being set at 35 years.

“This was in consultation with the independent engineer, who reviewed the assets’ geotechnical and structural design, historic performance and budgeted operating costs to determine a recommended useful life.

“All assets that were considered for life extensions have the relevant permits, contracts and land control to support the duration of useful life.”

Against all that, cynics may not be surprised to learn that none of USFP’s four directors was shown to have invested as much as their annual fees from this trust in its shares, according to Investec’s 2021 annual ‘skin in the game’ analysis.

Time will tell whether the 2022 analysis (to be published later this year) contains evidence that the board is sharing shareholders’ financial pain or pleasure.

So I intend to wait and see what happens at USFP, come rain or shine. In the meantime, its clean and green income continues to pay me to be patient.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in US Solar Fund (USFP) as part of a globally-diversified portfolio of investment trusts and other shares. 

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