Brookfield Renewable Partners LP (TSX:BEP.UN)(NYSE:BEP) is an attractive investment with a stable, high income. However, it’s also a compelling total-returns investment.
The shares have retreated 3.3% since it announced its $800 million equity offering on June 6 at $37.55 per unit. The equity offering completed on June 10. It now offers an attractive entry point for a high income with a yield of 6.3% at under $37 per share.
The business
At the end of the first quarter, Brookfield Renewable had 258 power-generating facilities totaling US$27 billion of power assets with operations across 15 markets in seven countries.
It has the capacity to generate about 10,400 megawatts of power. It generates 87% of its power from its hydroelectric portfolio and 12% from its wind portfolio.
It earns 65% of its cash flows from North America, 20% from Brazil, 10% from Colombia, and 5% from Europe.
About 90% of its revenues are contracted with inflation escalations, which makes its cash flows stable across different economic cycles. This makes a stable distribution.
Growing distribution
Brookfield Renewable has increased its distribution every year since 2012. Its annualized distribution growth has been 5.7% since then.
The company aims to grow its distribution by 5-9% per year from organic growth and proprietary project development. Its most recent acquisition was Isagen’s 3,000-megawatt Colombian hydroelectric portfolio. As of May, Brookfield Renewable and its institutional partners owned about 83% of Isagen.
In the first quarter, Brookfield Renewable increased its distribution by 7.2%, and its payout ratio was 65.4% based on the funds from operations per unit generated in the three months.
Why invest in Brookfield Renewable?
Brookfield Renewable has an investment-grade balance sheet with an S&P credit rating of BBB. Its debt-to-cap ratio is 38%.
Because Brookfield Renewable operates in a highly regulated environment and significant operating expertise is required, there are high barriers to entry.
Because it invests globally, it can look for the best risk-adjusted investments at any time and account for favourable foreign currency exchange.
The company aims for long-term total returns of 12-15% per year. So, Brookfield Renewable is not just about its juicy 6.3% yield, but it has growth potential as well.
Conclusion
Brookfield Renewable is in fair-value range today. Assuming its multiple remains constant and it achieved the low end of its 12-15% total-returns target for each year, a $10,000 investment today would turn into about $14,050 in three years and about $17,600 in five years.
Most importantly, the utility offers a stable, above-average yield of 6.3% that it aims to grow 5-9% per year. A $10,000 investment will generate $630 of initial annual income.
