Brookfield Renewable Partners (NYSE:BEP) and Pattern Energy (NASDAQ:PEGI) have caught the attention of income-seeking investors in recent years. Not only do they offer attractive current yields -- 6.7% for Brookfield and 8% for Pattern -- but they operate in the high-growth renewable energy sector.
While both companies look like attractive options for investors, one factor sets Brookfield Renewable apart as the better buy right now.
The bull and bear cases for Brookfield Renewable Partners
Brookfield Renewable Partners is one of the largest publicly traded renewable power generators in the world. The company focuses on producing hydropower, which currently comprises 76% of its portfolio, though it also has exposure to the wind and solar markets, due in part to its investment in TerraForm Power (NASDAQ:TERP). Brookfield sells about 87% of the power it produces under long-term contracts, which lock in prices, thus allowing it to generate stable cash flow. The company currently pays out about 90% of that cash to investors to support its high-yielding distribution, but aims to get that number down to 70% over the long term.
Brookfield reinvests its retained cash, as well as the proceeds from asset sales, into new investments such as TerraForm and its pipeline of development projects. The incremental earnings from those organic expansions, when combined with inflationary price increases on its legacy contracts and its efforts to improve cash flow at its existing assets, put Brookfield Renewable on track to grow cash flow at an annual pace of 6% to 11% over the next several years, which should support 5% to 9% yearly distribution growth.
The main concern with Brookfield Renewable is that the company's payout ratio is currently above its long-term target, in part because it issued equity in recent years to fund acquisitions like TerraForm. That percentage should improve over the coming year as the company's cash flow rises. Brookfield not only has two small expansion projects coming online during the first half of this year, but should see further benefit from its investment in TerraForm and its efforts to improve margins. As a result, Brookfield should have no trouble continuing to increase its distribution in the coming years, though the raises will likely be at the low end of its target range unless the company completes a needle-moving acquisition.
The bull and bear cases for Pattern Energy
While Pattern Energy doesn't operate any hydropower facilities, the wind and solar company still shares many similarities with Brookfield Renewable. For starters, the company also sells most of the power it produces under long-term contracts, a feature that provides it with steady cash flow to fund its high-yielding dividend. Meanwhile, the company has ample growth up ahead since it has the right of first offer to acquire a long list of renewable energy projects currently under development. Those acquisitions could grow the company's cash flow per share at an annual rate in the high single digits or double digits, provided it can obtain funding.
Pattern Energy has also been following in the footsteps of Brookfield Renewable to shift its financing strategy away from issuing equity to pay for acquisitions. However, in addition to selling assets, the company also halted dividend growth in late 2017 because it was paying out virtually everything that came in; this continues to be the case to date. The company hopes that in retaining more cash and selling noncore assets, it can reinvest this capital into higher-returning projects that will increase its cash flow per share and boost its payout ratio. These steps should eventually improve the company's financial profile enough so that it can start growing the dividend once again, though it's unclear how long this will take.
This one factor could be a difference maker
Both Brookfield Renewable and Pattern Energy generate renewable energy that they sell under long-term contracts, which enables them to pay attractive dividends to investors. Brookfield Renewable, however, intends to increase its payout each year -- and recently boosted it another 5% -- while Pattern Energy has pressed pause on dividend growth for the time being.
This difference matters more than income-focused investors may realize. That's because dividend-growth stocks have historically generated a nearly 10% total annual return, whereas non-growers have only produced a 7.4% total annual return on average -- less than the market's roughly 7.7% total annual return -- according to data by Ned Davis Research. With Brookfield aiming to continue increasing its payout, there's a higher probability that the company will continue outperforming the market, which it has routinely done over its 15-year history. That increased likelihood of delivering market-beating returns makes Brookfield Renewable the better buy right now.