GCP Infra trims dividend target to reflect market yields – In its half-year statement, released this morning, GCP Infrastructure has announced that it will trim its dividend target from 7.6p per year to 7p per year. This still leaves it trading on a yield of 5.9%, based on last night’s closing price.
10 years after it was launched, the market rates of interest have fallen a long way – it cites the yield on 15 year gilts, which has fallen from 3.9% at IPO to 0.4% today, for example. GCP lends for the long term but its borrowers are sometimes able to refinance their debt at lower rates. Over £300m has flowed back to the fund over the past couple of years, most of that relates to refinancings. It is getting harder for GCP to replace these investments with loans at similar yields without increasing the riskiness of the portfolio. Rather than do that, the directors have decided to cut the dividend.
The new 7p rate starts from 1 October 2020. Investors will still get 1.9p per quarter for the current quarter and the next.
COVID-19 impact is limited
“The board considers the company’s focus on availability‑based cash flows means the company is well placed to weather the impact of Covid-19. To date, the material impacts have been centred around the supply chain for waste wood, to which the company has exposure through three projects (representing c.9.8% of the company’s portfolio) and the progress of certain construction‑stage projects (representing c.0.5% of the company’s portfolio). In the medium term, the company expects Covid-19 to have a negative impact on electricity prices resulting from a reduced global demand for energy. Collectively, the forecast impact of these circumstances is not expected to be material.”
“The company’s focus on availability-based assets has meant the loan interest income received by the company has not been, and is not expected to be, materially impacted by the Covid-19 lockdown. In the medium and longer term, in addition to reductions in electricity prices, Covid-19 is likely to contribute to a low central bank interest rate environment for a longer period.”
“Further significant fiscal stimulus has been injected into the economy in an attempt to mitigate the impact of the virus. The UK Government’s balance sheet will look very different coming out of this crisis compared with going into it. Appetite, and capacity, for publicly financed infrastructure investment is likely to be impacted. The National Infrastructure Strategy, due to have been published in late spring 2020, is likely to be further delayed and the cancellation of the UN Climate Change Conference scheduled in Glasgow at the end of the year is likely to further set back the implementation of policies intended to support the 2015 Paris Climate Change Agreement.”
[This was probably a difficult decision for the board to take, but an entirely sensible one. These funds are valued for their high yield but they are also perceived to be relatively safe investments and it would not make sense to jeopardise the latter for the former. In any case, 5.9% is a remarkably high yield in an environment where interest rates and gilt yields are as low as they are.]