Brookfield Renewable Partners (BEP -0.93%) has quietly built one of the largest publicly traded renewable power platforms in the world. In the past five years alone, the company has invested $3.5 billion into new opportunities, including recently spending $420 million to nearly double its stake in TerraForm Power (TERP), which is a wind and solar energy generating company. Those investments have enabled Brookfield to pay a consistently growing distribution to investors, which currently yields an attractive 6.3%.
However, as good as that payout is now, it should be even better in the future, given the optimistic outlook Brookfield has for investing in the renewable power sector. That was evident in the comments of CEO Sachin Shah on the company's second-quarter conference call, as well as in his remarks in the quarterly letter to investors. Here's why Brookfield is so bullish on renewables.
Shifting from going green to making green
On the second-quarter call, Shah stated:
With regards to the broader investment environment, while growth of renewables was initially driven by growing support for carbon reduction with continued declines in the cost for new renewables, adoption is increasingly being driven by economic rationale. Even with declines in subsidies for renewables, we continue to see higher renewable targets from governments around the world. These targets will require significant investment over the coming decades and, as subsidies decline or fall away, this opportunity will increasingly favor those investors who can drive value enhancement of cash flows from operating expertise as opposed to financial or tax-driven buyers.
As Shah points out, there has been a notable shift in the main driver of renewable energy investment in recent years toward economics. Therefore, the sector now favors companies that know how to increase the operational efficiency of renewable energy-generating assets. That tilts the scale toward companies like Brookfield and TerraForm Power, which under the assistance of Brookfield, has focused much of its recent efforts at driving down costs to improve the profitability of its assets.
However, while the renewable investment landscape has changed, "we continue to execute our long-term business plan of establishing strong operating and growth capabilities in our core markets around the world across multiple technologies," according to Shah. That will allow Brookfield to "pursue acquisition and development opportunities" that it can efficiently integrate onto its platform so that it can generate strong returns.
A multidecade, multitrillion-dollar opportunity
Shah took things a step further in his letter to investors by giving a broad overview of the overall opportunity Brookfield sees ahead for investing in the renewable space. First, he provided a quick review by noting: "Globally, over the last five years, approximately $1 trillion of capital has been invested into renewables and over 1 million megawatts of new renewables have been added to the global power market. This is equal to replacing the entire electrical capacity in the United States with renewable power."
However, despite this massive investment in recent years "wind and solar still account for less than 8% of global power supply," according to Shah. He noted further that "even if one assumes the current annual pace of investment of approximately $300 billion continues, the level of overall renewable penetration will remain modest for many years."
Therefore, he believes:
We are in the early stages of a transformation of the global power grid, moving from fossil fuels to renewables. This will require significant investment over multiple decades. We estimate that replacing the non-renewable capacity in our core markets with wind and solar will require over $10 trillion of investment. Accordingly, the opportunity to invest and grow our business should be substantial for many decades.
Given the sheer size of the renewable investment opportunity in its core markets, Brookfield should have ample opportunity to expand its portfolio. That will allow the company to be selective and focus on building or buying assets that can generate high returns such as TerraForm Power, where Brookfield's incremental $420 million investment will produce $80 million in annual cash flow. It's high-returning investments like that -- which should be plentiful in the coming years because of the shift toward economics and the overall market potential -- that make Brookfield such a compelling renewable energy stock for the long haul.
The right approach to maximize this opportunity
Brookfield's focus on investing for returns has served it well over the years. Overall, the company has generated a 15% total annualized return for investors since its inception in 2001, which is more than double that of the S&P 500 over that time frame. Given the shift in the renewable energy-investment landscape and the sheer size of the opportunity, it's possible that that the company could widen its outperformance in the decades ahead. That's especially true if it can capture enough opportunities to increase its high-yielding dividend at or above the high end of its 5% to 9% targeted annual growth range.