Brookfield Renewable Partners (TSX:BEP.UN) and Brookfield Infrastructure Partners (TSX:BIP.UN) are sibling companies that are trading at bargain prices. They are under the same parent company, which owns a large stake in each business and manages them with a value-investing mindset. Particularly, they have an ongoing capital-recycling program that targets and buys quality assets at good values, optimizes operations, and potentially sells mature assets typically above the fair accounting value.
As interest rates have risen meaningfully since 2022, these stocks of companies with high debt levels are typically out of favour. Both dividend stocks pay out growing cash distributions. And their yields are pretty decent, too.
Brookfield Renewable Partners
In the last 12 months, the utility stock has declined meaningfully by approximately 29%. One reason is that it has a higher cost of capital because of higher interest rates. Another reason is that lower-risk, fixed-income investments have become better competitors for the capital of income investors. For example, risk-free Guaranteed Investment Certificates (GICs) offer yields of up to around 5%.
Brookfield Renewable Partners could potentially deliver higher long-term returns. Despite the correction, the stock has still delivered about 10.3% annually in the past 10 years.
From its renewables portfolio across hydro, wind, solar, and distributed generation and storage assets, it sustains a cash distribution yield of close to 5.1%. Importantly, its quality cash flow has allowed it to increase its cash distribution for about 13 consecutive years with a 10-year dividend-growth rate of 5.7%.
In the foreseeable future, management believes funds from operations growth of north of 10% can support cash distribution growth of 5-9% per year. Assuming a 5% growth rate, in 10 years, the initial yield of 5.1% would grow to a yield on cost of about 8.3%.
At the recent quotation of $35.78, analysts believe the undervalued stock trades at a discount of about 26%. Its long-term debt-to-capital ratio is about 78%, but it maintains an investment-grade S&P credit rating of BBB+.
Brookfield Infrastructure Partners
Brookfield Infrastructure Partners stock has fared better than Brookfield Renewable Partners, as BIP.UN has only declined about 16% in the last 12 months. Despite the correction, the stock has still delivered about 14.6% annually in the past 10 years.
From its diversified utility operations across utility, transport, midstream, and data infrastructure assets, it generates a solid cash distribution yield of 4.6%. Importantly, its quality cash flow has allowed it to increase its cash distribution for about 15 consecutive years with a 10-year dividend-growth rate of 9.1%.
Like its sibling, in the foreseeable future, management believes funds from operations growth of north of 10% can support cash distribution growth of 5-9% per year. Assuming a 7% growth rate, in 10 years, the initial yield of 4.6% would grow to a yield on cost of about 9.1%.
At the recent quotation of $44.31, analysts believe the undervalued stock trades at a discount of about 25%. Its long-term debt-to-capital ratio is about 74%, but it maintains an investment-grade S&P credit rating of BBB+.
The undervalued dividend stocks are supported by wonderful businesses that generate quality cash flows. So, they’re able to pay out decent dividend yields and could deliver satisfying returns for buy-and-hold investors from the current attractive levels.
