In the second half of 2024, the Federal Reserve has reduced interest rates by 75 basis points and might lower the yield by another 0.25% next month. Moreover, if inflation remains in check, the Fed will continue to lower interest rates over the next 12 months.
With multiple interest rate cuts on the horizon, investors should consider increasing exposure to capital-intensive companies in sectors such as energy and utilities. In the last three years, elevated interest rates have led to the underperformance of debt-heavy companies, making them attractive at the current valuation.
One such TSX stock is Brookfield Renewable Partners (TSX:BEP.UN). Valued at a market cap of US$12.8 billion, BEP stock trades 44% below all-time highs, allowing you to buy the dip and benefit from a lower interest rate environment.
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Is the TSX dividend stock a good buy?
Brookfield Renewable owns renewable power-generating facilities in the Americas, Europe, and Asia. It generates electricity through hydro, wind, solar, distributed generation, pumped storage, cogeneration, and biomass sources.
Since 2016, Brookfield Renewable has increased its funds from operations (FFO) per unit at an annual rate of 12%. Moreover, in the last 23 years, the company’s dividend distributions have risen at a compound annual growth rate of 6%. Today, Brookfield Renewable pays shareholders a yearly dividend of US$1.42 per share, translating to a forward yield of 5.6%.
Over the last 12 years, Brookfield Renewable has allocated more than US$40 billion towards capital expenditures, expanding its base of cash-generating assets. Between 2020 and the third quarter (Q3) of 2024, Brookfield Renewable has more than doubled its operating capacity to 37 gigawatts (GW), while its development capacity has increased by nine times to 200 GWs, making it one of the largest clean energy developers in the world.
A massive secular tailwind for Brookfield Renewable Partners is the artificial intelligence (AI) megatrend. The company projects energy demand to surge due to digitalization and the proliferation of AI. While global data centre demand is expected to grow by 15 times between 2022 and 2030, data centre power demand will account for 10% of global consumption by 2030, up from 2% currently.
Brookfield Renewable has emphasized that it has significant capabilities in all the large data centre markets globally. Notably, 90% of its 200 GW pipeline is in the world’s top 10 data centre markets, positioning it as the partner of choice to the largest buyers of clean power.
Brookfield Renewable is a blue-chip TSX dividend stock
One key reason for Brookfield’s underperformance in recent years is its widening interest expenses. In the last 12 months, Brookfield’s interest expense totalled US$1.94 billion, up from US$1.62 billion in 2023 and US$1.22 billion in 2022. Brookfield ended Q3 with US$25.5 billion in long-term debt, up from US$19.7 billion in 2021 and US$16.16 billion in 2019.
However, Brookfield’s strong balance sheet, capital-recycling initiatives, and access to diverse capital sources make it a top investment choice right now. With US$4.4 billion available in total liquidity, Brookfield has already invested more than US$10 billion in capital expenditures this year, which should drive future cash flow and earnings.
Despite a challenging macro environment, Brookfield reported an FFO of US$278 million or US$0.42 per share in Q3, up 11% year over year. Given a quarterly dividend of US$0.355 per share, Brookfield has a payout ratio of 84%, which is relatively high.
However, a lower interest rate environment would help reduce interest expenses and expand distributable cash flow per share over time.
