Clearway Energy: Another Chance To Buy This Long-Term Dividend Growth Play

Summary

• CWEN owns and operates a portfolio of renewable energy and natural gas assets across the United States.
• The winter storm in Texas did briefly freeze the company's wind turbines in the state, but it should have only a negligible impact on earnings.
• Class C shares yield 4.5%, while Class A shares yield 4.8%. I explain why I, as a retail investor, think the latter is preferable.
• There's no end in sight for this dividend growth machine.
• Looking for a helping hand in the market? Members of High Yield Landlord get exclusive ideas and guidance to navigate any climate. Get started today »

Investment Thesis

Renewable energy YieldCo Clearway Energy Inc. (NYSE:CWEN, NYSE:CWEN.A) was one of my favorite stock picks last year. I wrote about the company three times:

• July: "On The Verge of a Dividend Hike With a Long Growth Runway Ahead"
• September: "My Favorite Renewable Energy Investment Opportunity Right Now"
• November: "Renewable Energy Assets Still On Discount"

If you are unfamiliar with the company, I recommend at least skimming the above articles for a clearer picture of the portfolio and financial situation. I'll try not to repeat myself too much in this piece.

In short, with the recent pullback in CWEN's stock price, shares are cheap relative to the growth runway and offer a very attractive dividend yield of 4.5% for Class C shares (CWEN) and 4.8% for Class A shares (CWEN.A). I'll explain the difference between the two share classes in the conclusion, but first let's see where CWEN stands right now.

Image Source

Early 2021 Update

Last year was a critical one for CWEN. If you don't want to read the above articles, the one crucial piece of information you need to know about the company is that one of their largest customers — California utility Pacific Gas & Electric (PCG) — declared bankruptcy in 2019 due to liability for a forest fire, causing contracts with CWEN to be thrown into doubt and cash to become restricted. Prior to that, PCG was considered a strong utility. It was truly a black swan event that, presumably, utilities will work to prevent in the future.

CWEN was forced to cut its dividend because of this event, and it took about a year for the stock price to return to its previous high. Fortunately, the PCG bankruptcy was resolved by the end of June, 2020, and CWEN's contracts with PCG were upheld in the bankruptcy proceedings. CWEN's dividend was then reset to its prior level, and management issued guidance for dividend growth of 5-8% per year going forward.

What about the Texas winter storm? CWEN did see some of its wind turbines freeze during the event, causing a revenue hit of $20-30 million. However, this amounts to a mere 2% of 2020 revenue and will have a negligible impact on earnings. As a resident of Texas myself, I can tell you that winter storms like that do not happen very often.

Looking at 2020's full year results, we find that management has been taking multiple positive steps to achieve this level of annual growth. For one, $880 million was invested or committed to new investments in 2020, and several more projects are in the pipeline for this year.

Source: Q4 2020 Presentation

Through its relationship with parent/sponsor Clearway Energy Group, a developer of renewable energy assets, CWEN has right of first offer ("ROFO") agreements in place on a number of projects currently under construction. This gives the company clear visibility into the near future additions to their portfolio.

Source: Q4 2020 Presentation

There's one thing I want to point out. It doesn't get discussed very often with YieldCos, but it's important to look at the financial strength and credit quality of CWEN's customers, or counterparties, just like a landlord would do for a tenant. Weaker power customers are more likely to default on their contracts than larger, stronger ones.

Look above at the customers for CWEN's upcoming portfolio additions: American Electric Power (AEP), Toyota Motor Corp. (TM), Hawaiian Electric (HE), and other investment grade counterparties. This is incredibly important, because it means that CWEN's long power purchase agreements ("PPAs") with its customers are very unlikely to experience a default (putting aside, of course, freak incidences like forest fire-induced bankruptcies).

Notice one more thing from the above image. An increasing number of CWEN's investments involve both solar and battery storage. The rapidly improving technology of battery storage will make the undeniably spotty and unpredictable power produced by wind turbines and solar arrays more viable at the utility-scale level. It will means that excess electricity produced when the sun shines and wind blows will be stored for use when they aren't, or during peak usage times.

President Biden's ambitious (if aspirational) goal of getting the utility sector to net zero carbon emissions by 2035 will require more battery storage investment — a lot more battery storage investment. In effect, renewable energy YieldCos like CWEN are a dividend growth play on battery storage as well as renewables.

Looking further out, we find that the parent company's 10.1 gigawatt portfolio of development projects includes a meaningful chunk of battery storage projects. Over 1.6 GW of projects in the parent company's pipeline are in the "construction" or "advanced" states of development.

Source: Q4 2020 Presentation

And it's important to note that, despite how hot green energy has become recently, the cash available for distribution ("CAFD") yields on these assets are phenomenal. In the image below, we find that the investments CWEN has committed to in the last 12 months had a weighted average CAFD yield of 10.3%. That is for contracts with ~14 years of remaining term, and with primarily investment-grade customers as the counterparties.

Source: Q4 2020 Presentation

With CWEN's cost of capital falling (due to refinancing at lower rates and a generally rising share price), the spread between its weighted average cost of capital and its asset yields is widening. That is good for business and good for shareholders.

Forward Guidance

Like my wheelhouse of triple-net lease commercial real estate, CWEN operates in an industry that requires very little operational cost from the asset owner. Comparing full year EBITDA below to 2020 revenues of $1.199 billion, we find that CWEN's EBITDA margin is 90.2%. Its CAFD margin is 24.6%.

In other words, 90 cents of every new dollar of revenue goes to EBITDA, and 25 cents goes to CAFD. If interest costs can be lowered through deleveraging or refinancing at lower rates, then an even higher percentage of revenue will translate into CAFD.

Source: Q4 2020 Presentation

While it's difficult to project how $325 million in CAFD will translate into per-share results due to uncertain amount and timing of equity issuance, we can look at current shares outstanding plus commitments for new investments. The number sits at ~214 million, by my estimate. This would make 2021's CAFD per share $1.52.

Meanwhile, CWEN's annualized dividend is currently $1.296, or 85.3% of estimated 2021 CAFD. That's on the high end of CWEN's target payout ratio of 80-85% but nothing to worry about.

Of course, perhaps not all of the planned equity issuance will be carried out this year. If we use the current number of shares outstanding (201.7 million), then we wind up with a CAFD per share of $1.61 and a payout ratio of 80.5%, leaving room for more quarterly dividend hikes this year.

If we add up all of the projects CWEN has already invested in or committed to, management projects that these will push CAFD per share up to $1.80.

Source: Q4 2020 Presentation

You'll notice above that it says "prior" pro forma outlook. That's from one quarter ago. CWEN is constantly finding new investment opportunities that lifts its foreseeable CAFD outlook.

And the company ended 2020 with $894 million in total liquidity, including $465 million in cash — plenty of dry powder for future investment.

Bottom Line

Comparing CWEN's market capitalization to its cash available for distribution guidance for 2021, we find shares currently valued at 17.2x forward CAFD. I find that very cheap relative to the long growth runway ahead of this company. In the short to medium-term, CWEN projects CAFD and dividend growth of 5-8% per year. That's significantly better than the growth outlook of most other companies trading at 17x earnings.

Now, which class of shares to buy? I at first bought CWEN, but then I noticed that CWEN.A shares tend to trade at a lower price and higher yield. Upon investigation, I found out that both classes of shares pay the same dividend, and CWEN.A offers more than enough liquidity for a small retail investor such as myself. After I realized that, I have only purchased CWEN.A shares.

Why have two classes of shares at all? The answer, according to CWEN's investor FAQ page, is voting power:

Each share of Class C common stock entitles the holder to 1/100th of one vote with respect to each matter presented to our stockholders on which the holders of Class C common stock are entitled to vote. Each share of Class A common stock entitles the holder to one vote with respect to each matter presented to our stockholders on which the holders of Class A common stock are entitled to vote.

So, CWEN.A shares trade cheaper than CWEN, offer a higher yield, and have more voting power. (Not that I am an activist shareholder or anything.)

There are substantially more CWEN shares than CWEN.A shares. At the end of 2020, there were ~81 million CWEN shares and ~35 million CWEN.A shares, which means that CWEN is the more liquid share class. Moreover, management issues CWEN shares when it raises equity capital. CWEN's diluted share count has increased by 17.4% from 2018 to 2020, while CWEN.A's share count has remained flat.

For CWEN, buying at today's 4.5% yield would result in a 10-year yield-on-cost ("YoC") of 8.45%, based on the midpoint of growth guidance. Not bad!

But for CWEN.A, buying at today's 4.8% yield would result in a 10-year YoC of 9.0%! This illustrates the powerful combination of a higher starting yield with steady dividend growth. And it should also explain why I prefer the CWEN.A shares.

In sum, CWEN/CWEN.A is plugging away, growing steadily, and enjoying the ever-growing pipeline of investment opportunities on the road to decarbonization in the utility sector. There's no end in sight for this dividend growth machine.

Analyst’s Disclosure: I am/we are long CWEN, CWEN.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Jason Lewandowski]

why should I not worry about the dividend payout ratio of CWEN.A?

[T'pee]

Now that ADC and WPC (on which I have been happily collecting premia whilst waiting for the markets quarter to drop) have edged up a little its time to check this opportunity out, thank you @Cashflow Capitalist !

[Austin Rogers]

@T'pee Happy to be of service! We got some nice prices for CWEN.A and AY recently.

[Veritas1010]

Just entered at $24.84.

Small starter. But the journey begins. Interest rate tremors causing “renewed” renewable headaches. Transitory to good companies, but does present financing challenges and debt issues. 

Dividends therefore will be impacted to some degree, inevitable. Law of the market economics. Invest and hang on awhile for the ride, hopefully collecting some tolls along the way if the ride ends rougher than anticipated. Been there too.

[W Scott]

Been watching this one for a short period of time, happy I was only watching up to this point.

[Austin Rogers]

@W Scott Another chance to buy!

[User 48291705]

I have been watching CWEN as an alternative to my once owned PEGI that turned out quite nice for me. PEGI paid a superb dividend and eventually went private.

I own 2 Ute's, DUK and ETR, since I pay the latter every month for my electric bill here in Texas. It kind of blows me away, there are so many EV green chasers that fail to realize the electric Ute stocks or a yieldco such as CWEN is an excellent investment for the long term. Electricity and power generation will always be needed, especially as much of the world relies on Electricity to juice computers and EV cars.

Without electricity those TSLA's are as good as desert parked aircraft.

My goal is to buy CWEN @ a 5% yield but may buy some CWEN.A for now, and buy more on a correction that is forthcoming. When?? Is the golden answer, but this steroid market is due for a major correction, and will be a better buying opportunity.

🤙😷

[Racer-X]

@hangloose Hawaii I was in PEGI too. I didn't like how we were forced out at gunpoint. I stayed to the bitter end. This is my substitute for PEGI. I bought 1,000 shares here at $27.02 back in November. I should have a dividend deposited into my account here by end of day today, in fact, for CWEN.

I'm in Texas too. Our CWEN windmills in Texas froze up during that freeze. Would have been nice PR here if they were prepared with insulation and/or heating elements. Then they could say, look at us. We didn't fail. But, no, they were like everybody else and did the least possible to prepare sufficiently. Just being in code rather than going the extra mile.

And I sat in my car with heater on full blast, and it was sooo dang cold, it didin't it could never get more than just so so warm.

[User 48291705]

@Racer-X Yep, I sat in my driveway watching movies on my front screen, and ran the car in idle keeping my hiny warm. Then pulled it into the garage for the night, and turned off the engine obviously, but just slept in the car until the power came back on around 5 am. Still stayed in the car until the house got some heat, which took another 12 hours. Like to see how a EV car would have fared through that storm.

Bought some CWEN A today @$26, and have a buy out on CWEN at $25. Not a huge amount of shares, since I already have a stash of DUK and ETR.

Love to return to the islands, as I have had it with Texas traffic, nut politicians, and catastrophic weather, such as Hurricanes and now deep freezes.

[Racer-X]

@hangloose Hawaii Never been to Hawaii. Must be nice on a blue-island paradise away from all the crap. I hear it's soo expensive though. The cost of living, that is. But I should consider retiring there anyway, maybe. US citizen yet fully removed and in a place with the correct politics. I might like it there. The weather must be great there.

I don't know about the EVs but a lot of stories were circulating like this one for people that had a Ford F-150. Something I don't have, but that would have been a nice perk:

www.freep.com/...

But then again, I'd rather not put that kind of money into a vehicle. Or even an extra generator around the house in my case . I prefer the money. I just want the electric companies to be well prepared next time.

I had a hard time getting into my convertible because the windows need to automatically come down slightly for the door to open. And those were frozen shut. I had to do a lot of water pouring over the car to melt it enough. At least I had seats with heaters. And a full tank of gas.

[Snowy]

Thanks for all the detail and analysis.
"CWEN did see some of its wind turbines freeze during the event, causing a revenue hit of $20-30 million. However, this ... will have a negligible impact on earnings. ... I can tell you that winter storms like that do not happen very often."
Is there exposure to Texas residents or others for the failure of the wind turbines?

It appears Texas will socialize the costs of winterizing the power infrastructure, so it seems CWEN won't bear these costs. Is that your view?

[Veritas1010]

@Snowy,

Living here in Texas I think the answer must be yes. Just my observational two cents from the disaster that occurred. But with many individuals (like myself) having fixed year (multi-year) contracts that pass along to everyone is going to take time.

[Austin Rogers]

@Snowy CWEN may not shoulder the cost of winterizing the turbines, but the revenue hit is still there because they weren't producing power for a number of days and thus CWEN was not fulfilling its end of the PPA with whoever its customer is.

[Racer-X]

I'm in Texas too. And I too love this company. I have 1000 shares invested here in CWEN.A. I came in at $28 something. That's a big hit from our Texas winter. You'd think some extra precautions like insulation and heating elements would cost less than this "black swan" event, which I dn't believe is a black swan. Texas ignored the Fed's recommendations ten years ago. Now we are paying for it. An ounce of prevention is worth a pound of cure. Unless, of course, you prefer deregulation. I hope better regulation comes out of this. I expect more forest fires in California, and it's not because of mismanagement, and more deep freezes in Texas to come. That was, after all, caused by warming temperatures up north upsetting the jet stream, which allowed the freeze to reach farther.

Which is why, ironically, CWEN and others should be more tuned in to these facts. As in, prepare for things which you'd think they would know about since that is their reason to be. What do we have here? Climate deniers in wind energy? What kind of oxymoronic mgmt. would that be? :)

Maybe our costs can rise on preventative measures going forward. For a net positive. Like, the whole pint of going net carbon zero to begin with. Sheez! And I live here too. In Texas. The capital of climate denialism where the people that vote against themselves and have NO dividend income tried to run the Biden bus off the road not long ago. At least the loud ones (the weakest ones in the room).

I do apologize for my brethren. There is a lot more like me out here, I promise! We are growing. We will turn Texas blue eventually. And/or force the GOP to swing more to the center. Either way, Texas will lead the way! And, no, what you see on the surface here is not the future. Ted Cruz is our face, but I am our the manifestation of what's coming forward! The Anti-Cruz!

The End

[Austin Rogers]

@Racer-X Hah, I highly doubt that CWEN's management don't believe in climate change. Honestly though, as much as everyone on all political sides wants to blame someone for the utility disaster in Texas, I don't think anyone or any particular policy is to blame. Sure, the experts knew something like this winter storm was possible, but it was so improbable. It was worse than 2011 or anything that has occurred in Texas for decades and decades.

Our grid is geared to handle hot summers, which is what we reliably get every year. Winter events like what we just got are extremely rare and unpredictable. Even the week leading up to it, the meteorologists weren't certain that we'd get snow in my area, and we got 6 inches.

Weatherizing the grid for extreme winter events costs a lot of money, and I don't blame anybody for concluding that it's not worth the cost because of how implausible something like this recent event was to happen. But now that we've seen it happen, I think investment in weatherizing for winter is justified.

[smlaker]

@Cashflow Capitalist So, please be patient while I try to understand your position on weatherizing windmills in Texas. Do you only decide to buy homeowner's insurance after the neighbor kid burns your house down while playing with matches? Any single house burning down (except in California, apparently) is very, very small.

My wife and I drove from Fort Worth to Amarillo a few years ago, with more than several inches of freezing rain on the road. Worst driving conditions in my 50 years as a driver, including winters spent on Utah and Austrian roads. I'm not as sure as you that this was all that rare of an event, up north, at least.

Just wondering.

BTW, I tried to buy CWEN.A with Fidelity, and it won't let me. It keeps giving me a warning and telling me that the ticker symbol is actually "CWEN", then the website changes it to CWEN. I called a rep. and he told me that today (Friday, March 5) the ticker CWEN.A traded just 1,500 shares on the NYSE all day. YAHOO! and SA both show something like 384 K trading. Plus, he said there is no bid/ask prices showing on the NYSE website.

Someone is confused (besides me). Anyone know what gives?

SM

[Austin Rogers]

@smlaker That doesn't sound right to me (about CWEN.A having only 1.5k volume). I've never had any issues buying on Vanguard. You might try using an underscore _ instead of the dot between "CWEN" and "A". I had to do that initially when buying it in Vanguard.

And maybe I'm wrong about this, but I don't believe there has *ever* been an event in Texas history in which a winter cold front caused the simultaneous freezing of wind turbines, gas pipelines, power plants, and even some nuclear plants that knocked out up to half of the state's power generation capabilities for days on end.

So rather than normal homeowners insurance, I would liken it more to buying meteor insurance or terrorism insurance. Is it a possibility that your home could be destroyed via meteor or terrorist attack? Sure. Is it likely enough that you'll pay insurance dues to protect yourself from it? Probably not.

That's really what the situation is about: a cost-benefit analysis. How much are taxpayers and utility customers willing to pay to protect themselves from an event that may not happen again within their lifetimes?

[Traderrr]

Thanks for your thoughts.
I know you look only for US Stocks, but take peep on
EDP.LS/ESPR.LS
www.edp.com/...
They have been doing an excelent job, in expanding bussiness . Look at its 2021-2025 strategic update. After completing its 2019-2022 goals ahead of time And its pipeline is bigger than Clear Energy. I think is one of the biggest player

[Austin Rogers]

@Traderrr I will take a look! Thanks!

[Veritas1010]

@Traderrr,

They are a world class renewable leader.

The trouble is Portuguese foreign withholdings tax of 35%, and if you own the US listing + ADR fees ($EDPFY).

[cat2005]

Does this come with a K-1 for tax time?

[Austin Rogers]

@cat2005 No, it does not.

[cat2005]

@Cashflow Capitalist

Thank you.

[Eileen Dover]

I guess you had submitted the article a few days ago before earnings jumped the price (before Monday's opening) over a point, where it is again now in after hours trading. Will the Class A shares always have the same dividend amount or could it remain constant while the C shares dividend increases?

[Austin Rogers]

@Eileen Dover I have read before either on the company's website or in an SEC filing that they plan to issue the same dividend for each share class, and that's exactly what they've done historically.

[kbaba]

How would you compare BEP and CWEN?

[Austin Rogers]

@kbaba BEP is about 4x larger in size, its portfolio is almost completely renewables (rather than CWEN's natural gas assets), and it has substantial exposure to hydro power (over 50% of revenue). CWEN is smaller, its portfolio has some non-renewables (natural gas), but it has no exposure to hydro. Both have substantial pipelines of growth opportunities. Both will be investing heavily in solar + battery storage projects in the future. Both have similar forward dividend growth profiles.

[kbaba]

@Cashflow Capitalist Thanks, so outlook for both are relatively similar. It feels like I'm not yet missing out on a particularly outstanding company in the sector

[RandyFloyd]

Thanks, i was looking for a good spot to add

[Veritas1010]

Sorry meant to add $SSEZY. Moving into wind power big time in the U.K.

disc.: long $SSEZY.

[Austin Rogers]

@Veritas1010 Thanks for mentioning this one. I'm going to look more into it.

[Veritas1010]

Thank you very much for your continued focus.

I have followed this equity and $TRSWF (TransAlta) for several years. Sitting on my hands and finding other things to trade.

But, the time for that is over.

Renewables are inexorably the wave of the now ~ and more importantly right future. Democrat, Republican, Liberal or Conservative renewables of high quality have been able to lower there KwH costs in there PPA contracts and sign sound 10-12 year contracts to ensure legal compliance. One of the outstanding things I think you brought up is to examine the equities PPA contracts, are they the big players, are they capable of paying and are sufficiently large enough like (in the case of $PCG in California) there feet can and will be held to the hot coals of contract law.

I wish I could shout that I own a lot of $CWEN-A. I do not, try 4 shares I purchased yesterday with some residual trade money. But, I can assure you those lonely 4 will not be lonely for to long. I intend to grow and build this position with what I believe are other outstanding renewable opportunities.

That said, thank you for your persistent following of an often neglected fine corporation.

disc.: long in the sector: $TRSWF, $ED ( by dint of being the 2nd largest solar generator and 7th largest US renewable), $SSEZY, $NTOIY (Neste Oyj), $NEE. Custodial account: $FOJCY (FORTUM Ojy), $ENLAY, (ENEL SA), one could add $ENGGY, (ENAGÁS), $SNMRY, (SNAM SpA) too for NG and hydrogen. Check them all out - but only at the right price however.

[Austin Rogers]

@Veritas1010 I share many of the same thoughts! Thanks for sharing your picks!

[BTinSF]

The fire that Pacific Gas & Electric caused was anything but a "black swan event". PG&E was already under court supervision for having caused the gas line explosion in and devastation of a San Francisco suburb. And it caused multiple forest fires, some spreading to inhabited communities, before the major one that destroyed the town of Paradise, CA. PG&E simply was and is a sloppily run utility with a legacy infrastructure so ancient and crumbling that it famously has to black out communities whenever the wind blows.

I defer to you to say to what extent its relationship with CWEN effects that company, but the less any company has to do with PG&E the better because PG&E can and likely will cause more fires. The risk is so great that the state of CA has set up a program to protect its electric utilities from claims that could bankrupt them again (in PG& E's case, for a third time). But there remains the ancient gas infrastructure.

[Austin Rogers]

@BTinSF Surely PG&E will be forced to take steps to prevent further fires, either by the state, their insurance provider, or their lenders. It has to be on the top of their mind going forward.

[Vlae Kershner]

California went out of its way to protect the independent generators during PG&E's bankruptcy. The PUC knows it needs those contracts to be enforced to get companies to build facilities to meet its renewable power goals. So I wouldn't be too worried even if PG&E screws up again.

[kbaba]

Been in and out of CWEN-A for awhile. Sold when it started to seem expensive but open to revisiting. Are they subject to liability for their failures during the cold snap?

[Austin Rogers]

@kbaba Yes, to the tune of a $20-30 million hit to revenue, but it doesn't look like there will be any additional costs beyond that.