Shares of TerraForm Power Inc (TERP +0.00%) haven't gone much of anywhere after the company's control was taken over by Brookfield Asset Management (BAM +4.52%) in late 2017. Trading about 3% higher than the $11.46 cash buyout price offered, shares seem to slowly be trending lower.
But TerraForm Power is very clearly in a better position today than it was a few months ago. Here's why I think the stock is still a great buy under current circumstances.
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Pushing growth into high gear
Any yieldco needs to acquire renewable energy projects to grow the dividend long-term. Brookfield is on the ball getting growth assets already, announcing a $1.2 billion offer to buy Spanish renewable energy company Saeta. The offer will be paid for by using cash on hand, increasing its credit facility by $100 million to $600 million, and issuing $400 million of new shares. Brookfield backstopped that offer to ensure dilution doesn't drive shares lower.
What caught my attention even more, is that management thinks the Saeta acquisition would help cash flow so much they increased the 2018 target dividend by four cents to $0.76 per share. And they kept the projected 5% to 8% annual dividend increase guidance for the future as well.
Debt could be getting cheaper
After the Saeta announcement, Moody's announced it was increasing its outlook on TerraForm Power's debt from stable to positive. At the TerraFrom Power Operating LLC level, they think the acquisition will result in consolidated debt to EBITDA falling below 7.5 times and debt to cash flow remaining below 5 times.
Keeping borrowing costs low is another key for yieldcos because lower borrowing costs means a company can either bid more aggressively on projects or that there will be more excess cash flows on acquired projects than competitors with higher borrowing costs. After issuing $500 million of senior notes due 2023 at a 4.25% interest rate and $700 million of senior notes due 2028 at 5% in November, TerraForm Power is positioning itself to keep borrowing costs low long-term.
Moody's outlook upgrade impacted $1.9 billion of TerraForm Power's debt and if more acquisitions like Saeta come available the low borrowing costs could fuel more accretive acquisitions.
Slow and steady wins the race
Brookfield has moved quickly to revamp TerraForm Power's finances and grow the business overall. But investors need to keep in mind that this will be a fairly conservative operator long-term. TerraForm Power now plans to pay out just 80% to 85% of cash available for distribution, using the rest to fund new projects that will help grow the dividend long-term. That's a very sustainable way to operate a yieldco and Brookfield is spearheading that effort.
What I like about TerraForm Power today is the conservative operation and the willingness to jump on opportunities as they arise. The 6.6% dividend yield isn't a bad takeaway for investors either. That's why I'm keeping my thumb up CAPScall on My CAPS page for the long haul.
