The Canadian renewable energy sector took a hit last year as many players could not sustain high interest rates. TransAlta Corporation absorbed TransAlta Renewables, while Algonquin Power & Utilities is looking to sell its renewable energy business to keep up with the high interest cost. Amid this capital crunch, Brookfield Renewable Partners (TSX:BEP.UN) emerged strong as its large size ($23.6 billion market cap) and vast project portfolio give it access to large-scale institutional funding.
Why Brookfield Renewable Partners is a no-brainer?
Renewable energy is the future of the energy industry as climate risk creates the need for greener energy. Even fossil fuel energy giants like Enbridge are investing heavily in renewable energy to remain relevant. The 2050 net zero carbon emission goal and energy security will drive the renewables sector in the next 20 years.
However, the sector is still nascent and small players face funding challenges, which risk their sustainability as a profitable business. This is where Brookfield Renewable Partners are pioneers.
The company has one of the largest renewable energy portfolios of solar, wind, hydro, distributed generation and storage across 30 markets in 20 countries and five continents. Its portfolio has the capacity to generate 166 gigawatts (GW) of electricity, and another 134 GW is in the pipeline. It expects to deploy 18 GW in capacity over the next three years, generating additional cash flow of US$100 million.
Brookfield Renewable has reached the scale where it can recycle its capital and use it to fund more projects. The company expects to grow its funds from operations (FFO) at an average annual rate of 10% over the next five years. It will execute this target through a four-part strategy:
- increase energy prices to adjust for inflation,
- bring new projects online at a run rate of 7GW per year,
- improve operating efficiency, and
- pursue mergers and acquisitions (M&A).
The fundamentals
Brookfield has contracted 90% capacity under a 13-year power purchasing agreement, taking care of a 2-to-3% increase in FFO from inflation-adjusted prices. As for M&A, the company has been actively acquiring assets, completing three in 2023 and is in the process of completing three more this year. It has US$4.5 billion in liquidity that is sufficient to withstand a recession.
It has over US$24.4 billion in total debt, half the fair value of its property and plant (US$56.4 billion). Around $21.6 billion in debt is such that borrowers have recourse to the assets they finance. These assets are income-generating assets as they earn money from selling electricity. The company aims to allocate 70% of its FFO to pay dividends and the remaining to service debt and fund new projects.
On the operations front, the company has been posting net losses due to high depreciation and interest costs. If you look at the company 10 years from now, several previous energy projects will pay off their debt and drive the company’s profit margins.
What can investors expect from Brookfield Renewable Partners?
After understanding the business and its business model, it is time to understand what the company offers its equity shareholders. Brookfield Renewable Partners is buying back preferred shares to reduce the interest cost. Moreover, the company aims to grow its dividends by 5 to 9% annually by increasing its FFO through the four-part strategy.
Most dividend stocks don’t give capital appreciation. But Brookfield Renewable Partners is scaling its capacity organically and through acquisitions, driving its stock price. The stock surged 77% in the last five years after incorporating the 38% decline since January 2021. And if you look at the 10-year capital appreciation, your $10,000 would now be $23,764, excluding dividends.
The 5% dividend yield plus long-term growth in your invested amount makes Brookfield Renewable Partners a no-brainer stock to buy on the dip.
