Solar stocks have had a very ugly year, but there's one group that even the most risk-averse investors out there should take a closer look at: yieldcos. Listen in to find out why the power producers have great long-term prospects and should prove to be the safest, most reliable stocks in the renewable-energy and solar industries.
A full transcript follows the video.
This video was recorded on Dec. 20, 2018.
Nick Sciple: These are similar to traditional utilities, but they do own and operate some solar systems. We're not seeing any yieldcos that are pure plays right now. Most of these businesses have significant investments in other types of renewable energy, whether that's wind, hydroelectric, things like that.
What are you seeing with the yieldcos? Are there any companies that stand out as particularly attractive to you?
Jason Hall: If you go back a couple of years ago, there were a couple of pure plays. SunPower and First Solar had 8point3, which was their combined yieldco. I think the challenge is that if you're a power producer, you really want to be flexible. You want to be able to invest where you're going to get the best cash on cash return you can capture. And solar isn't always that. These businesses were too limited if they were strictly solar-focused.
There's been a lot of consolidation. You talk about companies that do a lot of things, NextEra Energy Partners is really interesting. It's a big electric owner, owns a little bit of wind. It also owns a lot of natural gas distribution. It's tied to NextEra Energy, the big utility that owns Florida Power & Light. It's really interesting. I think it's worth following closely because it's going to be adding a lot more renewables over time, especially a lot of solar.
Brookfield Renewable (NYSE:BEP), the majority of its cash flows come from hydroelectric. The whole Brookfield Asset Management (NYSE:BAM) family of companies, Brookfield Renewable owns around two-thirds of TerraForm Power, which is a third solar, two-thirds wind. It's a really interesting growth story that Brookfield Renewable is using as a way to drive its growth in solar and wind. I really like Brookfield Renewable a lot. It's down like 25% from its high close to the beginning of the year. Its yield is almost 8%, which I think is an absolute steal.
I also like Pattern Energy. Today, all of their cash flows come from wind. It's starting to look closely at solar, and it will be making solar investments in the coming years. That's more of a risk-reward play right now because it's paying out a ton of cash flows to support its dividend. Those cash flows are starting to grow, so it's closing that gap, but there's a little more risk right there. Basically, the way they make money is, they invest in or build these big renewable projects. They find a utility. They know who's going to be buying their power usually before they even build these projects out. Then they sell on 10 and 20-year contracts a power purchase agreement to sell the power capacity. They can pretty much project what their cash flows are going to be for the next decade based on what they already own. They take out debt, generally at a relatively low cost over long, fixed terms to finance those projects. Then, the spread of the cash flows that they generate vs. what their debt costs and their operating costs are, they generally pay the rest out in dividends, retaining a small amount to reinvest in growing the business.
If you're looking for really good dividends and dividend growth opportunities, that's what I really like about the yieldcos. That big 6,000% growth in solar that you talked about, these are going to be a massive owner of a lot of that growth. These companies are going to see their cash flows growing on a per share basis. They should grow pretty substantially over the next 20 or 30 years. These are really good dividend growth investments. Maybe my favorite part of solar to invest in, is the yieldcos.
Sciple: If our listeners are maybe a little squeamish about these shifts in demand volatility, this a good way to get exposure to solar and renewables in general without being quite as exposed to the roller coaster ride that you might see from some of these other businesses.