Dividend stocks are often considered stodgy, low-growth investments -- unless they pay a high yield. In that case, they're often considered too risky for many investors, because the payout may be too good to be true and on track for a cut.
Pattern Energy Group Inc. (PEGI), which pays a dividend yielding more than 7% at recent prices, certainly qualifies as high yield, yet it's probably far safer than many stocks yielding far less. It also offers the potential for life-changing upside for investors with a long-term mentality. I recently bought shares, and intend to buy more in the near future.
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What Pattern Energy does
Pattern Energy is a renewable-energy producer. The company owns partial and whole stakes in wind-power facilities in the U.S., Canada, and Chile. Through its relationship with privately held renewable-energy project developer Pattern Development -- with which it shares a number of executives, including CEO Michael Garland -- Pattern Energy will be able to acquire whole or partial interest in renewable-energy projects including wind, solar, power transmission, and others, in the years to come. With a 9% stake in Pattern Energy, Pattern Development has a substantial stake in seeing Pattern Energy succeed.
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It's been a strong growth business. Since its IPO in 2012, Pattern Energy's owned power capacity has increased 163% from just over 1 GW to more than 2.7 GW through last quarter. This has resulted in outsize cash-flow growth, with cash available for distribution increasing 258% over the same period. This has allowed the company to steadily increase its quarterly dividend every quarter for more than three years.
Over the next several years, Pattern Energy is planning to continue aggressive expansion. According to a recent presentation, the company's "Pattern 2020 Vision" sets a goal of near-doubling capacity by 2020. This growth is expected to be from wind, solar, energy storage, and even power-transmission projects.
Here's where the growth should come from
Over the past five years, renewables have received twice as much investment on a global basis than fossil fuels, and this trend is expected to continue -- and possibly even accelerate. One of the biggest reasons why is renewables are cheap.
Pattern Energy says wind and solar cost between $0.02-$0.04 cents per kWh, making it competitive with fossil fuel-generated electricity, and even cheaper in many cases. It can also be far more scalable to add power from wind and solar versus building traditional generation assets. Add in that large-scale energy storage is rapidly falling in price, and renewables are on track to disrupt every aspect of power generation and demand.
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Pattern Energy is projecting wind and utility-scale solar projects to increase by more than 100 GW in the markets it serves by the end of 2020. Considering that its total capacity was less than 3 GW at last count, Pattern only has to participate in a sliver of the coming growth to reach its goals.
Why renewables are winning
The path to investing success is littered with the bodies of many "fast-growth" stories that failed to pan out. There's certainly risk with Pattern Energy. The company will steadily add more debt to fund acquisition of new energy projects, as well as occasionally issue more stock for the same purpose. But even with this leverage risk and the impact of dilution, a few things stand out.
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To start, Pattern is in many ways a "right place, right time" opportunity. As mentioned above, investments in renewables have exceeded fossil-fuel investments for years, and that trend isn't slowing. This aggressive investment is one of the reasons why wind and solar power generation has become not just cost competitive, but is on track to be consistently cheaper than fossil fuels.
When you're the low-cost leader in a commodity like power generation, you're the winner. Pattern is on track to be a big winner, as long as management can continue to leverage its growing scale, keep debt and operating costs in line, and continue generating incremental cash-flow growth with each new project it adds to the portfolio.
Next, energy storage -- like wind and solar generation -- is getting cheaper and better very quickly. This puts Pattern and its renewables-generation peers on track to completely change the energy landscape. This will have huge disruptive implications for traditional power generation in coming years. It's already starting to disrupt the wholesale market.
The future of energy could look a lot like Pattern
Looking ahead a decade or more, utilities will be forced to move away from fossil fuel-powered electricity plants -- and not just because of pollution and global-warming concerns. It's going to be an economic decision, with wind and solar producing cheaper electricity. The acceleration of energy-storage technology could make transition happen much faster than people expect.
With a current yield of nearly 7.3% that's protected by long-term contracts -- 15 years, on average -- for its electricity production, Pattern Energy is worth owning for its dividend alone. But when you add in the immense potential for renewables to disrupt and displace fossil fuel-powered electricity generation, Pattern Energy could be one of the best growth stocks of the next 20 years. That's why I own shares.
