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SDCL Efficiency Income Trust (LSE:SEIT) is a FTSE 250 member that invests exclusively in the energy efficiency sector. It seeks to deliver cheaper, cleaner and more reliable solutions to commercial, industrial and public sector users. Its portfolio comprises everything from roof-top solar installers to providers of energy-efficient lighting.
For the year ended 31 March (FY25), it declared a dividend of 6.32p a share. This means the stock’s currently (16 June) yielding 12.8%. In cash terms, its FY25 payout is 14.9% higher than in FY21.
But some of its impressive yield has resulted from a significant fall in its share price. At 31 March 2021, the trust’s shares were changing hands for 112p. Today, one can be bought for 49p, that’s 56% lower.
If the share price was the same today as it was at the end of FY21, the stock would be yielding 5.6%. Although not as impressive, it’s still above the FTSE 250 average.
Buyer beware
But a high-yielding share needs to be examined closely. Before parting with my cash, I’d need to be satisfied that the share price decline is a temporary blip rather than an indicator of a more fundamental problem.
At the moment, the trust’s shares are trading at a 46% discount to its net asset value. And the situation appears to be getting worse. The average discount over the past 12 months has been 39%.
A variance is common for investment trusts, especially ones like SDCL that invest primarily in unlisted businesses. It’s difficult to determine accurate valuations when there’s no active market for a company’s shares. However, a 46% discount appears to be wider than most.
But I can’t find any obvious explanation as to why the trust’s shares appear so unloved, other than I think it’s fair to say that the sector as a whole has struggled with rising interest rates – most (including SDCL) have to borrow to fund their expansion.
However, sentiment could be about to turn.
Looking ahead
That’s because investment trusts are a great way of diversifying risk through one shareholding. And diversification’s important during periods of economic uncertainty, like the one we are currently experiencing.
SDCL has over 50 positions (spread across three continents) in companies operating in different sub-sectors of the energy efficiency industry.
And the switch away from fossil fuels and the greater emphasis on cleaner energy’s likely to help its portfolio. However, with relatively low energy prices at the moment, the transition may temporarily slow. But the trust appears to be operating in an industry that’s going to grow over the long term. Net zero’s here to stay.
The trust also has a “progressive” dividend policy which means it seeks to increase its payout every year. Since its IPO in 2018, this target’s been met. Although I see no obvious imminent threat, payouts are never guaranteed and this ambition could come under pressure if the trust’s underlying assets fail to perform as expected.
However, if I’m correct about it being in the right sector at the right time, then its share price could soon start to rise. And this means the stock’s yield is likely to fall. The near-13% return will then be a distant memory. But mindful of this, I think it’s a share that investors could consider adding to their long-term portfolios.
