There’s an old adage on Wall Street that says to take emotions out of investing. While that may make sense from a pure financial point of view, it’s hard to ignore the fact that nearly all human behavior is driven by emotions.
That’s why I don’t necessarily subscribe that adage, with the understanding that most investors want to feel good about their investments. Such may be the case with so-called ESG stocks like Brookfield Renewable Energy (NYSE:BEP), which enables investors to invest in assets that are both good for the environment and their wallets in the form of a growing and recurring income stream.
I last covered BEPC (the non-K-1 version of the stock) back in March of last year, highlighting its strong execution across a diverse array of assets. BEP hasn’t done so hot over the past 12 months with the stock falling by 23%, as income stocks appear to be out of favor with a market that’s chasing growth.
This can be a great thing for value investors, as marked apathy towards high-quality dividend-payers gives them an opportunity to add to their positions and grow their income for the long haul.
In this article, I revisit BEP with key updates on its business fundamentals and discuss what makes it an attractive dividend stock to own at the current discounted valuation, so let’s get started!
Why BEP?
Brookfield Renewable Partners is one of the largest owners and operators of renewable energy assets with a global presence that spans across 20 countries in North and South America, Europe, and APAC. This includes wind, solar, hydroelectric and energy storage assets with a combined 31,800 MW of energy capacity.
As shown below, half of BEP’s cashflows stem from Hydro, with the remaining coming from Onshore Wind (19%), Utility Solar (15%), Energy Storage (9%), and Sustainable Solutions (7%), which includes biofuel production, recycling, and global núclear services.
BEP sees stable and growing cashflows, as supported by 90% of its generation being under long-term contracts with a 13-year average duration, and 70% of its revenues are indexed to inflation. BEP also has a solid track record of value creation with a 12% FFO/share CAGR since 2016 and 6% distributions per unit CAGR since 2001.
BEP continues to deliver as it achieved record business results in 2023, for which results were released on February 2nd. This included record FFO/unit and the addition of almost 5,000 MW of capacity, along with the deployment or commitment of $2 billion of growth capital with its partners.
For the full year 2023, BEP saw FFO/share growth of 7% YoY, which is down slightly from 8% YoY growth in full-year 2022, when I last visited the stock. Encouragingly, BEP saw growth slightly accelerate during the fourth quarter of 2023, which showed 9% YoY FFO/unit growth. This was driven by the aforementioned inflation-linked protection on most of BEP’s assets. Other growth drivers in 2023 included the aforementioned addition of 5,000 MW new projects across wind, solar, and battery storage to BEP’s diverse cash flows.
Looking ahead, BEP is well-positioned to grow with $2 billion of accretive capital deployments across key markets with partners such as Westinghouse and Deriva Energy, which are expected to immediately grow its cash flows this year. BEP’s development projects clearly reflect a shift towards more Utility Solar as that represents 46% of the pipeline, and less toward Hydro, which as mentioned earlier already represents 50% of BEP’s cash flows. This shift could benefit BEP in that it gives the company more diversified cash flows with less reliance on Hydro.
Notably, BEP has a good line of sight on its 3-year plan, as supported by management’s update around its development pipeline over this timeframe during the last conference call:
Our advanced stage pipeline is materially de-risked with over 25% of the next three years’ planned capacity already under construction, an additional over 20% with revenues and inputs fully contracted, and an incremental over 30% in the final stages of securing PPAs and construction contracts.
Over the long-term, management targets 10% annual FFO/unit growth between now and 2028. This is supported by a combination of inflation escalation, margin enhancement, development pipeline, and M&A activities. Factors supporting the growth thesis include digitalization of the economy that’s being driven by Al. As shown below, global data center power demand is expected to rise by 15-fold between 2022 and 2030, from around 2% of global consumption to almost 10% by 2030.
BEP’s growth prospects are supported by a strong balance sheet with a BBB+ credit rating from S&P with $4.4 billion in available liquidity. It also has a long weighed average debt term of 12 years and over 96% of its total debt is fixed rate. As shown below, BEP has no debt maturities this year, and just $300 million worth of debt maturing in 2025; which can be handled with available liquidity.
Risks to BEP include the portion of its assets (around 10% of cash flow) that are not contracted, which may lead to variability in cash flows. Moreover, growth estimates based on data center demand may not materialize given the uncertain nature of how quickly technology in the space progresses.
Plus, potential for higher interest rates should inflation prove to be stickier than expected could result in higher cost of debt funding and make future investments less accretive than expected.
BEP’s lower share price compared to last year also makes equity raises expensive for the company, but management has demonstrated flexibility by repurchasing 2 million units over the past year (instead of issuing new shares) due to the depressed valuation. Over the next few quarters, I would pay attention to management comments on interest rates and how that might change their outlook for funding its development pipeline.
Importantly for income investors, BEP currently sports a respectable 6.1% distribution yield, and the distribution is covered by an 85% payout ratio based on $1.67 FFO per unit generated in 2023. Management targets annual distribution growth in the 5-9% range, which is supported by the estimated 10% annual FFO/unit growth between now and 2028, as shown below.
Turning to valuation, I find BEP to be attractive at the current price of $23.23 with a forward P/FFO of 12.4. This appears to be reasonably cheap for a company that’s expected to grow its bottom line FFO/unit by 10% annually with the support of a BBB+ credit rating.
Analysts estimate 12.5% FFO/unit growth this year and 6-11% FFO/unit growth in the 2025- 2027 timeframe, which I believe is reasonable considering the aforementioned tailwinds and development pipeline. Considering all the above, I would target a P/FFO for BEP of at least 15x, which represents material upside potential from the current valuation. Sell-side analysts have a consensus Buy rating on BEP with an average price target of $29.36, which implies a forward P/FFO target of 15.6x.
Investor Takeaway
BEP has a strong track record of delivering stable and growing cash flows, and this is further supported by its last reported results. With a diversified portfolio of renewable energy assets, a solid pipeline of development projects, and a strong balance sheet, BEP is well-positioned for continued growth in the coming years.
Lastly, BEP presents an attractive investment opportunity for those looking to add a sustainable and growing income stream to their portfolio. With a 6.1% distribution yield and current undervaluation compared to its growth prospects, now may be a great time to consider buying BEP for potentially strong total returns.