Renewable Dividends: Infrastructure

The last post on January 8^th “Renewable Dividends:  Utilities” made the case for the utility sector as a source of reliable dividends.  NextEra Energy (NEE:  NYSE) was presented as an example of a utility with both renewable energy credentials and a health dividend payout policy.  In a quest for ‘green’ dividends it is may be necessary to look at beyond the conventional electric utility.  In this post we look at the new age energy infrastructure business model as a source of good dividends.

Brookfield Renewable Partners, LP (BEP, BEPC:  NYSE) entered the renewable energy sector by accumulating a portfolio of power producing properties.  It is more a manager of utility assets than a single utility company.  The company boasts ownership of over 5,000 generating facilities on four continents that have a combined capacity of 19,400 megawatts.  Hydroelectric power is its primary strength, but Brookfield also has interests in wind and solar power.  Brookfield is about to get larger.  In December 2020, the company announced plans to acquire a distributed solar platform from Exelon Corporation (EXC:  Nasdaq) that command one gigawatt of distributed generation capacity.  Brookfield is to pay $810 million for the deal, which is expected to close in early 2021.

In the twelve months ending September 2020, Brookfield reported $2.8 billion in total sales, resulting in a net loss of $163 million.  However, cash earnings were $1.7 billion and operating cash flow was $986 million.  Cash in the bank totaled $482 million at the end of September 2020.  The cash kitty helps support a fairly hefty debt load.  Brookfield’s debt-to-equity ratio is 101.76 as of September 2020.     

Strong cash flows also support the payment of dividends on Brookfield’s Class A preferred shares at a specified rate over Canadian treasury bills.  In the first week in January 2021, Brookfield announced a reset of the distribution rate for its Series 7 preferred limited partnership units to 5.5% on an annualized basis.  The Series 8 preferred units distribution rate will be 4.59% on an annualized basis.  The recent rate decisions put the forward annual dividend yield near 2.78% at the current BEP price level.

Some may find Brookfield a more labor-intensive investment than most.  It requires extra effort to understand who is at bat and who is on first base.  First, a parent corporation, Brookfield Asset Management, owns 60% of Brookfield Renewable Partners, LP, leaving limited partners very much in the minority.  Its structure as a limited partnership means investors will share in the partnership’s income (or losses) which is reported to the IRS on a special form called a Schedule K-1. 

For investors who find the K-1 a nuisance, Brookfield recently set up a new C-corporation in Canada.  Its stock also listed on the New York Stock Exchange under the symbol BEPC.  Unlike the distributions accorded holders of BEP units, the BEPC dividend gets the dividend tax credit on the full dividend. 

The plump dividend, tax treatment and simplicity of the C-corporation may seem appealing, but BEPC also requires some study.  The Class A shares of the C-corporation are structured so that each share gets the same distribution as a BEP unit.    

Investors may find Atlantica Sustainable Infrastructure Plc (AY:  NYSE) a plain vanilla opportunity.  Another energy infrastructure play, Atlantica offers investors a stake in renewable power generation assets in South American, Europe and South Africa.  Its portfolio of over two dozen facilities command over 1,500 megawatts of renewable energy generating capacity. And another 342 megawatts of natural gas fired generating capacity.  The company also owns over a thousand miles of electric transmission lines and dabbles in water desalination. 

Atlantica reported $1.0 billion in total revenue in the twelve months ending September 2020, more than half of which is earned by the company’s renewable energy assets.  Revenue provided $62.5 million in net income or $0.62 per share in the twelve-month period.  Operating cash flow was a healthy $345.4 million.

Over the next year Atlantica is expected to pay $1.68 in dividends.  At the current price level, the forward dividend yield is 3.64%.  Before reaching for this tempting yield, investors need to be aware of a hefty $6.6 billion in debt that represents a 403.00 debt-to-equity ratio.  Analysts see growth ahead for Atlantic and have projected high single digit growth rates for sales over the next two years and 50% growth in earnings in 2021 and another 30% in the year following.    

 

Large- and mid-capitalization companies like BEP and AY are not the only energy-related dividend payers.  The next post will feature a small-cap dividend opportunity.

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.