As global energy transitions to renewable sources, the coming decades will be the golden age for renewables. To invest in this sector, Brookfield Renewable Partners (TSX:BEP.UN) stock is a top pick to consider.
Some investors prefer to invest in Brookfield Renewable (TSX:BEPC). This corporation version is economically the same company but trades at a premium, pays eligible dividends, and therefore offers a lower dividend yield than BEP.UN.
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Global and diversified
Brookfield Renewable is a leading renewable power utility that’s in the right place for the decarbonization trend. As a large player, it’s also diversified geographically and by technology. Its multi-technology expertise and access to capital allow it to pursue quality acquisitions such as the recent one in Origin Energy, Australia’s largest integrated power generation and energy retailer business that has a 24% market share. Over the next decade, BEP sees the possibility to invest at least AU$20 billion to build up to 14 gigawatts (GW) of renewable, storage, and firming capacity. Other than Australia, BEP also has operations in four other continents.
Origin Energy is but one example. Currently, BEP’s portfolio has operating capacity of approximately 25 GW. Additionally, it currently has about 110 GW in the pipeline across solar, distributed generation, storage & sustainable solutions, wind, and hydro.
Dividends and valuation
There are many places to invest for green energy. However, it’s rare to find investments that pay a steadily growing dividend income. Brookfield Renewable is a rare find. So far, it has increased its cash distribution for 13 consecutive years with a 10-year dividend-growth rate of 5.7%.
At about $43 per unit, it offers a cash-distribution yield of roughly 4.2%. Going forward, it can healthily increase its dividend by at least 5% per year. Analysts believe the stock is discounted by about 15%, while BEPC trades at an approximate premium of 12% and yields 3.8%. So, BEP may be a better buy if you have room in registered investment accounts like a Registered Retirement Savings Plan or Tax-Free Savings Account.
Recent results
Earlier this month, Brookfield Renewable reported strong first-quarter results. To highlight, its funds from operations per unit (FFOPU) jumped 13% to US$0.43. The FFOPU is important because it’s a good gauge for its cash distribution safety. This result equates to an FFO payout ratio of about 78% for the quarter. Of course, the full-year results would be more telling, as it would better smooth out any volatility in quarterly results.
During the quarter, the utility put in service about 700 megawatts (MW) of capacity. So, it’s on track to commission roughly 5,000 MW of capacity this year. It continues its regular capital-recycling program, which it expects to juice out proceeds of about US$4 billion (approximately US$1.5 billion net to Brookfield Renewable). This means the company has ample liquidity to reinvest for long-term growth. The company also has no material near-term maturities, and management has set it up such that it has limited variable interest rate exposure.
Investor takeaway
For investors who wish to invest in green energy and our sustainable future, Brookfield Renewable is a relatively safe way to do so. It enjoys an investment-grade S&P credit rating of BBB+. As well, it has a track record of execution and cash-distribution increases.
Brookfield Renewable has a multi-decade growth runway. It pays a good dividend yield and can continue increasing its cash distribution (dividend for BEPC). It could be a winner, especially if you aim to buy on meaningful dips. Even assuming the stock experiences no valuation expansion, a low-ball return estimate based on a 4.2% yield and 5% growth leads to long-term returns of 9.2% per year.
