Brookfield's Dividend Growth Plans

Shares of renewable power producer Brookfield Renewable Partners, LP (BEP:  NYSE) are currently trading with a forward dividend yield of 3.21%.  This is even better than the 3.0% yield that prevailed in March 2021, when the post “Renewable Dividends Revisited” was published and featured an introduction to Brookfield.  At the time the stock has back down from its record high price of $49.64 set in January 2021, as concerns about strategic direction began to drag on the stock. 

The price has not recovered.  This has been no surprise given that some institutional investors have actually shown preference for the corporate shares trading under the symbol BEPC versus the recently created partnership shares that trade under the symbol BEP.  The extra demand was apparently not enough to soak up the BEPC shares that had been held by the Brookfield parent, Brookfield Asset Management (BAM:  NSYE).  BEPC shares have also languished.

Continued weakness in the shares of both entities could be a siren call to contrarian investors looking for bargain.  First, a tough question needs to be considered.  What do sellers know that could be relevant for dividend hungry investors?

The company topped $1.0 billion in total quarter sales for the first time in the three months ending March 2021.  The accomplishment apparently made little impression on critical traders.  This might be due to the simply operating income of $180 million that was not sufficient to cover the company’s interest burden and tax bill.  Brookfield reported a quarter loss of $66 million or $0.24 per share in the quarter. What may have really put of traders is the fact that the quarter report came in under the consensus estimate, which of course triggered a spate of estimate reductions and ratings downgrades.  It apparently never crossed anyone’s mind in this dance of the consensus that the analysts might have simply had it wrong in the first place and had unjustifiably anticipated the higher earnings level.  

Forget the income statement, with its clutter of non-cash expense and whether it met or did not meet expectations. Operating cash flow gets to the heart of what Brookfield management has to work with to grow the company.  That is after all what will drive growth in the future sales and earnings.  It is future earnings and not the consensus estimates that create value.

In the quarter ending March 2021, the company converted 34% of each sales dollar to operating cash flow for a total of $351 million.  A fairly commendable accomplishment, but not up to Brookfield’s average sales-to-cash conversion rate of 37% over the last four years.  Indeed, the quarter ending September 2020, 46% of each sales dollar ended up in operating cash and was at management’s disposal for capital investment, stock repurchases or dividend payments.

Brookfield management has recently suggested that their strategic growth plans could deliver 20% annual growth over the next five years.  Their budget range is $800 million to $1.0 billion per years in annual equity investments in internal projects as well as acquisitions.  They will need to up their spend.  In the twelve months ending March 2021, the company invested $671 million, the highest spend on capital projects in the last four years.

The company has put more into acquisitions and this might also help to explain investors trepidation over valuation.  In December 2020, Brookfield agreed to acquire the solar energy business of the utility Exelon (EXC:  Nasdaq) for $810 million.  This was on top of the plans to buy the Shepherds Flat windfarm in Oregon for another $700 million.  More recently, Brookfield came to terms with TerraForm Power, Inc. (TERP:  Nasdaq) to buy up all the TERP shares Brookfield does not already own in exchange for BEP equity.   

The cash deals could put some pressure on the company’s balance sheet in the near term, but there is considerable potential to increase operating capacity at both sites.  The Exelon portfolio could nearly triple if the entire 700 megawatts of development is completed.  A switch out of turbines at the Shepherds Flat wind farm to larger, more efficient models could increase the farms capacity by as much as 25% with limited additional infrastructure investment.

With all these plans in the works, how will dividends fair against the competition for financial resources?  Management has also indicated they want to actually increase distributions by 5% to 9% annually, suggesting the dividend is not only secure it is likely to increase.  Solid growth prospects coupled with a favorable view on dividends in the C-suite make a strong argument for BEP dividends.

 

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.

 

Image:  Hydroelectric Dam, Isagen, Colombia; Source:  Brookfield.com