Brookfield Renewable: A Green Energy Giant With A 4.3% Yield

Summary

• Brookfield Renewable is up 22% year-to-date, breaking with the broader market downtrend to outperform its peers.
• The renewable energy giant currently offers a 4.3% distribution rate to its unitholders.
• Its development pipeline now stands at approximately 126,000 MW against a target to grow the distribution by 5% to 9% annually.

Blue Planet Studio/iStock via Getty Images

Brookfield Renewable (NYSE:BEP) (NYSE:BEPC) is having a great 2023, its commons are up 22% since the start of the year and it recently reported dual beats on its fiscal 2023 first-quarter earnings. The yieldco generates long-term contracted revenue from the sale of its power and distributes the bulk of its income to its unitholders and shareholders. The yieldco last declared a quarterly cash dividend of $0.3375 per share, in line with its prior payout and for a 3.87% forward yield. The equivalent yield on the limited partnership units is 4.3% as they're lower priced. Brookfield Renewable has remained resilient against wider concerns around the health of the US economy and a regional banking crisis that has weighed on other yieldco peers. Indeed, Clearway Energy (CWEN) (CWEN.A) is down 6.5% since the start of the year with Atlantica Sustainable Infrastructure (AY) down 5% over the same time period.

Hence, is Brookfield Renewable still a buy? It depends. The yield from alternative yieldcos is substantially higher and more compelling. Clearway currently offers a 5.3% dividend yield on its class A shares while Atlantica is yielding 7.11%. Further, Brookfield Renewable's current price multiple relative to its operating cash flow per share for the last twelve months stands at 7.23x, this is versus 4.37x for Clearway and 5.92x for Atlantica. Hence, Brookfield Renewable is not cheap on a comp basis at its current price. The year-to-date rally has been abnormal against the broader market chaos sparked by a Fed funds rate hiked to its highest level since 2008 and a rate of inflation that still sits far above its historical average. However, bulls would be right to flag a business that has fundamentally evolved from a string of acquisitions that look set to drive Brookfield's target to grow its dividend by 5% to 9% every year. The preferreds (BEP.PA) offer an alternative 7% yield on cost and trade at a 25% discount to par.

FFO Growth Surges From Year-Ago Comp

The $15 billion yieldco recently reported fiscal 2023 first-quarter results that saw revenue come in at $1.33 billion, a 16.7% increase over the year-ago quarter and a beat by $50 million on consensus estimates. This growth was pushed higher by inflation-driven price escalation across most markets and favorable hydroelectric generation. As of the end of its first quarter, Brookfield held 25,700 MW of operating capacity and annualized LTA generation of approximately 71,200 GWh. This was against a development pipeline of approximately 126,000 MW.

Brookfield Renewable Partners

The yieldco generated FFO of $275 million, around $0.43 per unit, and a 13% increase on a per unit basis over its year-ago comp. This also beat consensus estimates by $0.02. The hydroelectric segment generated FFO of $219 million with wind and solar generating an aggregate of $119 million in FFO against corporate costs of $106 million. Interest expenses did jump by 48% year-over-year to $394 million against Brookfield's effort to grow through fixed-rate debt. Critically, the current quarterly payout forms a 78.5% payout ratio against the current FFO per unit.

Brookfield together with a consortium agreed to acquire Australian utility Origin Energy during the quarter for $12.4 billion. The deal will give Brookfield ownership of Australia's largest integrated power generator and energy retailer and should see Brookfield invest $20 billion over the next decade to construct 14 GW of new renewable generation and storage facilities in Australia. Hence, the company continues to keep the growth ball rolling.

2023's Returns Outlook

From a macroeconomic perspective, the rest of the year is likely to be characterized by the Fed's more data-dependent approach to fighting inflation. The May FOMC meeting saw the Fed funds rate get hiked by 25 basis points and the market now widely expects the Fed to pause rates at its June FOMC meeting. Markets are currently pricing in an 82.6% chance of a pause, a development that would help broader stock market sentiment recover. This could set the backdrop for Brookfield's valuation to potentially move higher. Overall, I think its yieldco peers look more attractive here. Any such improvement in stock market sentiment was inflation to continue to fall and the Fed to perform a dovish pause would likely see stronger positive volatility from both Clearway and Atlantica.

Brookfield Renewable owns and is building the infrastructure of a low-carbon world that's being pursued by most of the world's developed economies. There will need to be substantial investments into renewable energy production capacity over the next decade. The need for this has been emphasized by the 2022 energy crisis sparked by Russia's invasion of Ukraine. I like that Brookfield has teamed up with Shoals (SHLS) to introduce a Charging-as-a-Service solution for electric vehicle charging infrastructure. This is a move that provides exposure, albeit marginal to FFO, to the secular growth of EVs. As one of the largest renewable energy companies, Brookfield Renewable has positioned itself in a strong position to fully ride the opportunities posed by the generational shift to low-carbon energy. However, I'm rating the stock as a hold against its current valuation versus peers.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CWEN.A, AY either through stock ownership, options, or other derivatives. 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

[jasonjones]

They overpaid the business unit for Westinghouse. BEP should bought think Westinghouse originally! I suspect inter corporate sales.

[Dhyano]

Thank you for this excellent article. Do you have any feedback about the preferreds on the TSX exchange, BRENF? Are they similar to the BEP.PA on the NYSE?
Dhyano

[User 58804746]

Investing rookie here. I'm totally blown away by some of the payout ratios I've seen. Some in normal range, and others at over 6000%. I need to understand this. Could Brookfield's current cash flow, and with their new expansion in Australia, outweigh the negatives of their extreme payout ratio?

[D.S. Leach & C.E. Leach]

@MatiasNeedsMoney

You need to read up on the difference between C-corp financial metrics, where EPS and Payout Ratio are typically meaningful, versus MLPs where EPS and Payout Ratios are typically meaningless. BEP is an MLP.

Hint: Plant and equipment depreciation play an very outsized role in MLP financial reporting making EPS and EPS/Dividend poor metrics for evaluating health of the MLP.

Cheer$!

[cmilas]

@MatiasNeedsMoney For companies like this, as well as REITs and other MLPs, you need to look at FFO instead of EPS as depreciation majorly impacts EPS to the downside.

[cpr1200r100]

Brookfield is reminding me more and of GE when they went Finance...they seemingly could always materialize EPS and know really understood their financial structure.

Hence, I'm trying to unwind my BAM and BEP positions.

[LifelongMetsfan1]

@cpr1200r100 when you type “unwind” are you saying you are selling shares?

[Dividending]

Own BEPC (Canada) shares while expecting excellent growth and compounding with a long runway.

[cmilas]

You should mention the corporate bonds, BEPI and BEPH which are higher up in the capital ladder than the preferred shares and offer higher yields.

Also, the parent company has corporate bonds BNJ and BNH which are one notch higher in credit quality and offer similar yields.

Why buy a preferred share that can suspend it's dividend when you can get a bond that won't unless they default. And you get a higher yield on the bond!

[D.S. Leach & C.E. Leach]

@cmilas

Like BEPI and BEPH, BNJ is perpetual and payments are qualified (vs ordinary income) and are eligible for the lower 15% tax rate. BNH has a 2080 maturity date and payments are qualified (not eligible for the 15% tax rate).

Cheer$!

[cmilas]

@D.S. Leach & C.E. Leach A maturity date is a positive when you are buying shares at such a discount to the redeemable price.

[D.S. Leach & C.E. Leach]

@cmilas

Not when that maturity date is 2080 unless you are leaving those bonds to your grandchildren.

[D.S. Leach & C.E. Leach]

I chose to invest in their perpetual baby bonds BEPI and BEPH when they were beaten down and yielding north of 8%. Very unique subordinated notes.
No maturity date (perpetual).
Interest payments qualify for the 15% tax rate.

Check the link below as well as the prospectus.

www.quantumonline.com/...

www.sec.gov/...

[cpr1200r100]

@D.S. Leach & C.E. Leach

Thank you.

[gastro4]

@D.S. Leach & C.E. Leach thoughts on BIPI and BIPH?

[D.S. Leach & C.E. Leach]

@gastro4

I view BIPI and BIPH similar in credit quality to BEIP and BEPH. I would note that BIPI is a perpetual subordinated note with payments eligible for the lower 15% tax rate. BIPH is not perpetual and has a 2081 maturity (still a very long duration). BIPH payments are NOT eligible for the 15% rate.

Cheer$!