Investors looking to buy dividend stocks should avoid chasing a company’s yield and instead analyze its ability to grow these payouts over time, which increases the effective yield significantly. Typically, due to their widening cash flows and earnings, dividend-growth stocks also allow investors to benefit from long-term capital gains.
One such TSX dividend stock is Brookfield Renewable Partners (TSX: BEP.UN), which has returned a whopping 1,500% to shareholders in the past two decades after adjusting for dividends, easily outpacing the broader markets. Despite its outsized gains, BEP stock currently trades 50% below all-time highs, offering you a forward yield of almost 5.7%.
Let’s see if you should invest in BEP stock right now.
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Is Brookfield Renewable a good stock to buy?
Brookfield Renewable is among the largest clean energy companies globally. Its wide economic moat and diversified portfolio of cash-generating assets allowed BEP to increase its funds from operations, or FFO, by over 10% annually on a per-share basis in the past decade.
BEP continues to expand its portfolio through a combination of strategic acquisitions and organic growth. It recently partnered with Cameco to acquire Westinghouse Electric Company (WEC) for almost US$8 billion. WEC operates the largest nuclear services business globally, and BEP will now own 51% of the company.
Brookfield has collaborated with several other companies to acquire Origin Energy’s energy markets division for $18.7 billion. The strategic acquisition of this Australia-based utility company should help BEP increase cash flows consistently.
Several of these acquisitions have built-in growth prospects, making BEP stock a compelling investment right now.
Moreover, as Brookfield’s cash flows are indexed to inflation, its earnings should grow between 2% and 4% due to elevated inflation levels. Its higher power prices should also drive the bottom line higher. For example, BEP has increased its average prices from US$70 per MWh (megawatt-hour) in 2022 to US$75 per MWh in 2023.
Its mergers and acquisitions are forecast to increase FFO by 9% annually through 2027. The Brookfield Global Transition Fund, or BGTF, closed its first fund worth US$15 billion in 2022 and has started raising capital for the second investment fund, which should accelerate BEP’s merger and acquisition profile in the upcoming decade.
What is the target price for BEP stock?
The clean energy sector is capital intensive, and Brookfield Renewable has allocated around US$4 billion towards capital expenditures in the last two years. Armed with an investment-grade balance sheet, BEP generates enough cash flows to lower its debt profile and reinvest in growth projects.
BEP’s cash flows are stable across business cycles, as it sells the power generated in its facilities via long-term power-purchase agreements to utilities and other corporate entities.
The company aims to increase dividends between 5% and 9% annually in the future. These payouts have almost doubled in the past decade, which suggests dividends have grown by 7% annually since September 2013.
Analysts remain bullish on BEP stock and expect shares to rise by more than 50% in the next 12 months. After adjusting for dividends, total returns may be closer to 58% in the next year.
