Why Investors Should Consider 8point3 Energy Partners

How a yieldco like 8point3 Energy Partners makes money, what it does, and why long-term investors who want to get into the energy space should take a look into it.

Motley Fool Staff
Motley Fool Staff
Feb 21, 2017 at 2:19PM
Energy, Materials, and Utilities

Green energy adoption has reached the point of no return, and usage is only going to increase in the future.

In this clip from Industry Focus: Energy, Motley Fool analyst Sean O'Reilly discusses green energy yieldco 8Point3 Energy Partners (NASDAQ:CAFD), and why it's a company that long-term energy investors should be interested in. Tune in to find out how the company makes its money, how it manages to have pay out a whopping 7.4% dividend yield to shareholders, how long its growth is projected to continue, and much more.

A full transcript follows the video. 

This podcast was recorded on Feb. 9, 2017.

Sean O'Reilly: So, Gaby, I want to talk to you about my pick in the energy and materials space, which is 8point3 Energy Partners. What the heck is 8point3 Energy Partners?

Taylor Muckerman: I'm interested, too. I'd never heard of this company until you brought it up last week.

O'Reilly: Really? You're serious?

Muckerman: I'm dead serious.

O'Reilly: Oh, wow. Get out your pencils, kids. It is actually named after the time it takes for light from the sun to reach the Earth. It takes 8 minutes and 20 seconds for sunlight to reach the planet. Twenty seconds is a third of a minute, so, hence, 8point3 Energy Partners. It was formed as a joint venture between First Solar and SunPower and is known as what is called a yieldco. This is actually analogous to something that you know a lot about, Gaby, which is REITs, real estate investment trusts.

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Lapera: I do know a lot about those.

O'Reilly: So how does a REIT run their business? They own buildings, they charge rent to tenants, they try to expand their foothold by occasionally selling shares or debt, buying new buildings, building new buildings, etc. It is not uncommon -- correct me if I'm wrong -- for a REIT, over the years, to have more and more shares outstanding. That's kind of what happens. Or, they just stay stagnant.

Lapera: It depends on the REIT. I'll say that. But, this isn't a REIT show, so continue. 

O'Reilly: The other thing REITs do, of course, is pay out dividends to investors.

Lapera: Right, 90% of their taxable income.

O'Reilly: Right. Same deal with these guys. It is more or less the same business model. First Solar and SunPower build and install solar panels, and installations. It's mostly for industrial and large corporate customers, compared with a Tesla or SolarCity that do rooftops. They created 8point3 Energy Partners to buy these projects, because, as you can imagine, it's not the easiest thing to do to build a $400 million solar-panel array in the middle of the desert and just keep that in your books forever. It is nice to be able to spin that off, maybe keep some of the revenues for servicing the project, but that is how they function. They created 8point3 Energy Partners together with its subsidiaries to acquire, own, and operate solar-energy generation projects in the United States. As of right now, at the end of Nov. 30 -- they have not reported earnings yet -- they own nine utility-scale solar-energy projects and have a total capacity of 642 megawatts of electricity. It is a beautifully simple business model. It owns a bunch of solar panels; it contracts the energy generator for them out to utilities and pays out the cash to shareholders. 

"Sean, what is this dividend yield that you keep talking about," you're wondering. Currently, it has a current quotation of about $13 and a half per share. It has a dividend yield of 7.4%. That's pretty darn good in a world where Treasury bills are yielding 3%, where we're at the very top of what has been an eight-year bull market. It actually compares very nicely with the average long-term returns of the stock market, which, in the last hundred years, as you know, was 8%. And, to boot, it is green. They own solar panels and free energy.

Lapera: So I feel good.

O'Reilly: You feel great. You're making 7% a year.

Lapera: I mean, investors in general feel good, not me in particular.

O'Reilly: Of course. You would never feel good. You would never feel anything about --

Lapera: Like the planet, you might feel good about this stock. Continue.

O'Reilly: The lawyer over in the corner is looking at us. That's it; it's meat and potatoes. The company is projected to grow its dividend by about 12% this year. They are projecting long term to grow their dividend by about 15%. That is subject to revision based upon the number of projects that they are able to purchase from their sponsors. The pipeline of First Solar and SunPower does, more or less, appear to be rather lengthy. They do have a number of projects coming on board in the next couple of years that they'll be buying. And the last question I'm sure you're wondering is, how long will this continue? Because utilities won't just buy power from these people indefinitely without talking about it again. The average length of their current contracts for all their projects -- meaning they could actually stop right now buying projects from First Solar and SunPower, not expand at all, just keep hanging out, literally doing nothing but collecting money from selling electricity from the utilities -- the answer is 20 years. You could just sit there and do nothing for 20 years and get 7% per year off this thing.