- BEPC has a strong balance sheet.
- It has distinguished itself from peers through its globally-diversified alpha-generating business model.
- It still enjoys a massive growth runway today.
- As a result, we expect it to remain a dividend growth machine that meaningfully beats inflation over the long term.
- Despite a historically rich valuation, BEPC still meets retiree needs like few other stocks today.
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As we detailed in our recent piece Great News For Renewables, renewable energy has proven to be a terrific investment in recent years and continues to enjoy a strong future outlook as well. Perhaps nowhere is this more true than with one of Brookfield Asset Management's (BAM) subsidiary focused on the sector: Brookfield Renewable Corporation (NYSE:BEPC).
Since going public to offer investors a K1-free alternative to the economically-equivalent Brookfield Renewable Partners (BEP), BEPC has performed exceptionally well, not only outperforming BAM and BEP, but also the broader stock market (SPY) and the broader renewable energy production market (RNRG):
While its past has been phenomenal, we believe that BEPC still possesses the qualities that position it as an ideal stock for retiree portfolios.
#1 Strong Balance Sheet
BEPC's balance sheet is built to withstand rocky conditions as is reflected in its sector-leading BBB+ credit rating. With no corporate maturities until 2025 and an overall corporate debt weighted average term to maturity of 14 years, the company has little to worry about in terms of meeting debt obligations. Additionally, their cost of capital is quite low, as they recently issued 30-year 3.33% interest rate green bonds.
Furthermore, any asset-level issues that may come up can be easily met given their $3.3 billion in total available liquidity. Not only that, but this liquidity - in combination with ~$180 million in annual proceeds from up-financings on their perpetual hydropower assets - gives them tremendous flexibility to respond to and invest opportunistically to public and/or private market volatility.
Their secret to maintaining attractive returns on equity and highly efficient use of capital while maintaining little financial risk to the company is their extensive use of non-recourse asset-level debt. Roughly 90% of their total debt is non-recourse to the corporate level and only 18% of their capitalization is corporate debt.
#2 Globally-Diversified Alpha-Generating Business Model
While BEPC does pay hefty asset management fees along with distribution incentive fees to its parent BAM, overall we believe they get their money's worth. BAM's numerous competitive advantages and shrewd capital allocation skills give it access to capital, deals, operational expertise, and diversification that it simply wouldn't have otherwise.
As a result, its growing footprint in core renewable energy generation asset classes like hydro, solar, and wind power in the most opportunistic deals and markets across the globe offers BEPC not only economies of scale and other operational efficiency benefits, but also the opportunity to invest creatively on some of the most attractive risk-adjusted terms possible and then have a larger-than-typical pool of potential buyers to sell to as well via BAM's business network, thereby maximizing their disposition price.
Between buying on a value basis, leveraging Brookfield's operational expertise to squeeze a few extra hundred basis points in annualized yield from the asset, and then maximizing accretive disposition and capital recycling opportunities, BEPC and BEP have been able to generate massive alpha over the years.
A classic example of how this typically works is BEPC participating in a massive deal involving a multi-billion dollar portfolio of high quality renewable energy assets whose previous owner had run into financial difficulty. BAM utilizes its own capital along with BEPC's and BAM's institutional partners' to complete the deal. This deal then benefits BEPC and enables it to achieve superior returns to competitors in several ways:
- First, due to the size of the deal, potential buyers are limited (i.e., BEPC and its peers typically wouldn't be able to complete the deal themselves). When combined with the distressed circumstances, the BAM-led investment group gets a better deal on the assets than it would otherwise due to limited competition and the need to liquidate the assets quickly.
- Second, being able to own a fraction of the asset portfolio gives BEPC increased diversification relative to what it could achieve if it were forced to own entire assets, thereby improving its risk-adjusted returns.
- Third, BAM and its partners (such as BEPC), then typically extract as much equity as they can from the asset with non-recourse debt, thereby dramatically juicing their returns on equity without incurring additional risk to the corporate balance sheet. They also typically get much better interest rates and/or debt terms than the previous owner did due to their high credit rating, reputation, and business plan to enhance the asset's cash flows.
- Fourth, BEPC benefits from BAM's operational expertise whereby it enhances the cash flows of the assets.
- Finally, BEPC benefits from BAM's extensive business network when it comes time to sell the mature, enhanced asset and therefore they typically enjoy very strong returns on their original equity investment.
BEPC is also not shy about taking advantage of public-private market disconnects to enhance returns. If their shares ever trade at a premium, they almost always issue new equity and then reinvest the proceeds into relatively cheaper private assets in order to grow the intrinsic value of the shares. Conversely, if their private assets ever trade at a distinct premium to their publicly traded equity, they have proven more than willing to sell either entire or - preferably - partial stakes in their assets in order to repurchase their shares at a discount. In the meantime, they continue to operate the assets and earn an asset management/operation fee from their joint venture partners, further juicing their returns on equity.
All told, you will be hard pressed to find more shrewd real asset investors and capital allocators than Brookfield. BAM has set the tone and BEPC is no different.
#3 Massive Growth Runway
With green energy forecasted to consume 50% of total global energy investments this year and only growing beyond that moving forward, BEPC's area of expertise should be in high demand for years to come and the business should therefore be able to attract plenty of capital and find plenty of new opportunities to invest in.
As the following video highlights, China, the European Union, and the United States are all undergoing political wind shifts that strongly favor green energy investment, adding a further boost to the green energy investment community.
On top of that, ESG investing has exploded as a whopping 33% of total assets under management in the United States fall under this category. This trend is extremely powerful, as it gives renewable energy companies like BEPC nearly limitless access to capital while also improving their cost of capital, making half of the equation needed for attractive growth (the other half being attractive places to deploy that capital) a near-given.
Finally, thanks in large part to government subsidies as well as the vast sums of capital being invested in the sector, research and development into the renewable energy sector has made great strides in recent years towards closing the performance gap with fossil fuels.
The costs of producing solar energy have plunged by 82% over the past ten years and Berkeley Lab recently released data indicating that wind power efficiency is nearing parity with that of natural gas:
and investment portfolios are expected to increasingly weight towards alternative high yield investments:
Given BEPC's exposure to multiple infrastructure assets and geographies, it is well positioned to capitalize on this trend.
#4 Dividend Growth Machine
With a healthy balance sheet, a very strong alpha-generating business model, and tremendous growth potential, BEPC's dividend growth outlook looks as bright as its dividend growth history is:
With mid-to-high single digit annualized dividend growth for the foreseeable future, BEPC offers retirees a dependable income stream that should meaningfully beat inflation over time.
BEPC has it all:
- Strong balance sheet
- Globally-diversified alpha-generating business model
- Massive growth runway
- Dividend growth machine that meaningfully beats inflation
If we have one concern here it is that the valuation still remains a bit elevated. As you can see in the chart below, BEPC still trades at a near 10% premium to its K1-issuing counterpart:
Investors will therefore have to decide if they are willing to deal with the K1 or not and make their decision based off of that. The bright side is that for much of its history, BEPC has traded at a much wider premium to BEP than it currently does, so - depending on how you look at it - BEPC could be considered relatively cheap at the moment.
Additionally, even though shares have appreciated strongly over the past year and the dividend yield is low by historical standards:
retirees should also evaluate their priorities. Is a near 3% yield that is expected to grow at a 5%-8% annualized rate and is backed by a disruption-proof defensive business model and sector-leading balance sheet unattractive for someone looking for a yield that beats bonds and will keep up with or even beat inflation?
Sure, BEP/BEPC might not crush the market moving forward like they have in the past, but retirees typically are not looking for market-beating returns. Instead, they focus on optimum risk-adjusted income streams that will pay their living expenses today, keep up with inflation in the future, and preserve as much of their principal as possible for their heirs after their retirement is complete. For meeting those goals - and particularly for those who do not want to deal with the hassle of K1s - BEPC is a dream stock.
In a day and age in which income investors increasingly have to worry about technological innovation disrupting their dividend checks, BEPC is an oasis offering peace of mind.
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This article was written by
Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.Samuel runs High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.
Analyst’s Disclosure: I am/we are long BAM. 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.
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