Better Buy: Brookfield Renewable Stock vs. Aritzia

Both stocks could make good money for investors, but Brookfield Renewable stock appears to be a better buy right now.

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Investors who typically invest in Brookfield Renewable Partners (TSX:BEP.UN) and Aritzia (TSX:ATZ) are probably different because they are completely different businesses and stocks. Investors would invest in them for different reasons. However, if investors were choosing between the two, here are some comparisons they can make.

Having a general understanding of the businesses can provide insights as to what kind of investments you’re getting into.

Businesses

Brookfield Renewable operates one of the largest global portfolios of renewable power and decarbonization solutions. Its portfolio is diversified across asset type and geography. Its operational capacity is about 32 gigawatts (GW) with about 26% in hydroelectric generation, 32% in wind, 22% in utility-scale solar, and 19% in distributed generation, storage, and sustainable solutions across North and South America, Europe, and Asia Pacific. It has about 132 GW of projects in its pipeline for long-term growth.

Brookfield, which has extensive experience in compounding capital for the long haul, is the general partner and manager of Brookfield Renewable with roughly 47% of equity interest in the business. Management sees corporate demand for decarbonization growing as well as governments around the world having supportive policies for decarbonization.

Aritzia designs exclusive fashion brands, as it puts it, for the “everyday luxury” market and sells through its brick-and-mortar stores in Canada and the United States as well as on its e-commerce website. It has about 11 in-house brands, including Wilfred, Babaton, Tna, The Group, and Sunday Best.

Earnings quality

Market emotions of fear and greed affect stock price movements in the short term. However, stable, predictable, and durably growing earnings tend to drive a growing stock price in the long run.

Brookfield Renewable Partners has been growing its funds from operations (FFO) on a per-unit basis over time, which has also supported an increasing cash distribution for its unitholders. For example, in 2023, it increased its FFO per unit by 7% year over year to US$1.67.

The apparel retail business is cyclical, but the company seems to know what it is doing with fashion design, marketing, and growing in North America. For example, earnings fell substantially by 79% in fiscal 2021, which is more or less related to the COVID-19 pandemic and related economic shutdowns and supply chain issues. However, its earnings rebounded past the fiscal 2020 results by the following year.

Returns

Cash distributions and dividends are a good way for investors to get steady returns no matter what the economy or market does. Notably, the underlying business must support the payout in a healthy manner.

Brookfield Renewable has a track record of increasing its cash distributions. It has consistently kept its one-, three-, five-, 10-, 15-, and 20-year cash distribution growth rate at north of 5%. Its five-year cash distribution growth rate is 5.2%. Its last hike that occurred this month was also 5.2%. At the recent price of $31.28 per unit, the utility stock offers a nice cash distribution yield of 6.1%.

Assuming a fairly valued stock, combined with the income from the cash distribution, investors can approximate long-term returns of about 11% per year based on a 5% growth rate. After a multi-year downtrend, the stock trades at a decent discount of 20%, according to the analyst consensus.

Unlike Brookfield Renewable, which should form a base from investor support for its yield during a market correction, Aritzia, which doesn’t pay a dividend, will be penalized more in a selloff. So, Aritzia stock will be more volatile. However, when it rights the ship or the economic environment improves, the growth stock could deliver stronger returns. At $36.43 per share at writing, analysts believe the apparel retail stock is fairly valued.

Between the two, BEP is a better buy for sleeping better at night and getting steady returns from quarterly cash distributions. That said, investors interested in Aritzia can take a closer look at the stock when it falls a lot for the potential of higher growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Brookfield Corporation and Brookfield Renewable Partners. The Motley Fool has positions in and recommends Aritzia. The Motley Fool recommends Brookfield, Brookfield Corporation, and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

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