Don't Miss Out On Brookfield Renewable's Stock Surge, With Dividends That Pay Off

Brookfield Renewable Corporation (NYSE:BEPC) and its twin Brookfield Renewable Partners (BEP) have been one of the star performers during the first year of the COVID-19 pandemic as the EV sector in general clearly outperformed the broad markets and drew enormous interest and capital from investors. The stock surged almost 75% in 2020 and the sharp COVID-19 selloff in late March provided one of the best ever buying opportunities for investors.

Just as the sun was shining bright on Brookfield Renewable in 2020, the sun has set since the beginning of 2021. When Brookfield Renewable listed as a C-Corp under the BEPC ticker, BEPC initially clearly outperformed BEP despite both companies being economically equivalent. The only difference is that BEP is a publicly traded partnership sitting in Bermuda whereas BEPC is a Canadian corporation listed on NYSE and TSX as a means to “provide investors with greater flexibility in how they access BEP’s globally diversified portfolio of high-quality renewable power assets“.

The stock hit rock bottom at the end of 2022 with the price collapsing to $27.19 but has already recovered a fair bit and is now above $30. Even though the bottom is seemingly in even today’s price provides very attractive long-term buying opportunities and the case can be made for a generational buying opportunity.

What is going on at Brookfield Renewable?

Brookfield’s latest earnings were reported in November 2022 for the third quarter of 2022, which showed strong Y/Y FFO growth of 15%. Quarterly highlights include:

• Securing investments totaling $6 billion across various transactions and regions.
• Delivering an incremental 2,600-gigawatt hours of clean energy annually, including 1,200-gigawatt hours to corporate offtakers.
• Commissioning approximately 2,700 megawatts of new projects, including commencing the commissioning of a 1,200-megawatt solar facility in Brazil.
• Executing on a 19,000-megawatt under-construction and advanced-stage pipeline, which is expected to contribute approximately $260 million of FFO annually.
• Completing or advancing $1.4 billion of asset recycling activities.

Brookfield’s operating results were strong and its backlog is well-equipped. The company is making strong progress towards its long-term plan:

… we believe the future opportunities for investing in clean power and the energy transition will be even greater than they are today. And our scale, track record and global capabilities position us as a partner of choice and decarbonization

Source: Brookfield Renewables Q3/2022 Earnings Call

The year 2022 has seen several growth initiatives by Brookfield Renewables and heavy M&A activities as the company is executing on its quest towards global decarbonization. Brookfield Renewables is a very active player in the M&A space as it is the world’s largest renewables company, with an around 24 GW operating energy portfolio, and executing on these external growth opportunities is key for the company to expand its diversified clean energy business. The company’s project development pipeline for carbon capture and storage now exceeds 100GW and thus provides ample opportunity for multi-decade growth.

Brookfield Renewables biggest opportunity this year came last month when “a consortium led by Brookfield Renewable submitted an A$18.4B non-binding buyout offer for Origin Energy, Australia’s second largest power producer and energy retailer.“

If the deal goes through, it would be the largest buyout of an Australian company by private equity and the largest deal in the country this year. Brookfield and MidOcean see big opportunities in the transition to cleaner energy in Australia and believe Origin’s assets offer a good way to invest in this sector. The deal requires approval from the Australian Competition and Consumer Commission and the Foreign Investment Review Board to proceed.

By acquiring Origin’s energy markets business, Brookfield plans to invest an additional AUD 20 billion ($13.1 billion) by 2030 to build renewable energy and storage capacity and accelerate Origin’s transition to clean energy, helping Australia reach its emissions-reduction targets faster.

If Australia is serious about reaching its decarbonization targets I think they should accept that deal when the world’s biggest renewables company is joining the mission to invest tens of billions of capital into the country creating jobs, funding growth and helping the government achieve its policies.

Brookfield is making these investments via its massive energy transition fund and the same applies to its recent $8B acquisition of Westinghouse Electric where Brookfield teamed up with nuclear fuel supplier Cameco. As for Brookfield it is basically an intra-party deal with Brookfield Business Partners which acquired Westinghouse out of bankruptcy in 2018 and is now expected to earn a 60% IRR and $4.5B of total profit if the deal goes through. For Brookfield Renewables it is a big bet on a prosperous nuclear future and even though very few ignorant countries like Germany are phasing out nuclear energy, worldwide, nuclear energy is on the rise and I am a firm believer in that energy source. It offers the best balance between costs, reliability and CO2 emissions and is a key enabler of the energy transition. Ironically, while the German government, acting against the interests of the people, is exiting nuclear energy by April 2023, Germany’s neighbors like France and Poland are heavily investing into it – and will then eventually also sell some of that power to Germany.

The most difficult thing is actually building these nuclear power plants (admittedly the disposal of nuclear waste is also a challenge). Construction usually takes many years or even a decade and eventual completion is often way off the initial schedule. The good thing is Brookfield Renewable’s entry point into nuclear power generation is not subject to these risks as Westinghouse solely acts as a service provider and does not take on any commodity, construction or significant fixed price contract risk, nor does it have any exposure to nuclear liabilities as it operates in countries where those liabilities for nuclear accidents lies with the plant operators

Source: Brookfield Renewables Q3/2022 Earnings Call

Having shed more light on arguably the most important growth driver for Brookfield Renewable, namely M&A activity, let’s briefly outline the other three subsequently:

• Inflation escalation: Based on existing contracts with its customers, Brookfield expects at least 2% to 3% annual FFO per share growth by increasing rates accordingly. That inflation estimate between 2% and 3% appears very conservative given recent inflationary developments, and thus there might be room for more. It will be interesting to see how management comments on inflation during the next earnings call as inflation has run extremely hot this year and the question is what they expect it to be over the next 4-year term.
• Margin enhancement: As Brookfield Renewable continues to grow, that expanding scale should help reduce costs and enhance margins, thereby adding another 2% to 4% to annual FFO growth over the next 5-year term. Also, with energy prices on the rise, new contracts or renewed contracts, should carry higher rates as well.
• Development pipeline: As mentioned above, Brookfield Renewable is continually looking to expand its operating portfolio and its pipeline, but at the same time it is also busy in moving pipeline projects through the various stages from planning and development to production. Depending on the pace, the company targets to contribute 3% to 5% to annual FFO per share growth by developing renewable energy capacity.

Overall, these three growth levers coupled with previously mentioned M&A activities should drive annual FFO per share growth in excess of 10% and thereby add another successful chapter to the stock’s long-term track record of strong performance. Management already confirmed that it had locked in at least 8% annual FFO per share growth, and thus with increasing confidence, investors can bank on double-digit FFO growth into the year 2027.

What’s in it for Dividend Investors

Brookfield Renewable features an impressive dividend track record with a long streak of consecutive dividend increases. Over the last couple of years, the distribution has been growing at a 6% clip and this sort of pace is expected to continue as Brookfield is working towards its goal of achieving a 70% FFO-based payout ratio.

The latest hike to the distribution came in February 2022 when the company announced another 5.3% Y/Y increase. These 5% hikes have become the norm over the last couple of years as the

Overall, over the next 5 years, Brookfield Renewable has strong visibility on double-digit FFO per-unit growth, which ultimately leaves no doubt that this streak of at least 5% annual distribution raises will easily continue. The company itself is targeting to grow its distributions by 5% to 9% annually and, given strong YTD performance in 2022, I have confidence that the next hike in just a few weeks could be more than the 5% we got used to as the company is working towards reaching its target payout ratio.

Investor Takeaway

Brookfield Renewable Partners is a leading global renewable energy company with a diverse portfolio of hydroelectric, wind, and solar assets. As concern about climate change and the need to transition to cleaner sources of energy increases, demand for renewable energy is expected to continue growing. This presents a strong growth opportunity for companies like Brookfield Renewable Partners.

Brookfield Renewable Partners has a track record of strong financial performance, with consistent revenue and earnings growth over the past several years. The company also has a solid balance sheet, with a strong credit rating and low levels of debt.

Brookfield Renewable Partners has a strong track record of dividend growth, and currently offers an attractive dividend yield in excess of 4%. This makes it an appealing option for income-focused investors.

The stock was an absolute bargain for the most part of the last decade as despite strong operating results there simply wasn’t that much interest to invest into EV and renewable stocks. That all changed with the COVID-19 pandemic somehow, and although the resulting euphoria has catapulted the stock to new all-time highs, the current sell-off gives investors an above 4% safe dividend yield that is expected to grow at a very solid pace in the future.

Today’s stock price presents a generational buying opportunity and as soon as fears about elevated interest rates and higher cost of debt start to subside I am confident the company’s stock price will recover and return to its long-term growth trajectory in-line with annual double-digit FFO growth.