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Better Buy: Brookfield Renewable Partners vs. TransAlta Corporation

By Reuben Gregg Brewer - Updated Apr 13, 2019 at 5:14PM

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A transition is taking shape in energy. Do you want to suffer through it with TransAlta, or leapfrog to the new tech with Brookfield Renewable?

There are big differences between Brookfield Renewable Partners L.P. (BEP 3.25%) and TransAlta Corporation (TAC 3.37%), two Canadian energy entities. For one thing, Brookfield sports a 6.7% yield, while Transalta offers a yield of only about 2%. But there's much more to understand about these businesses before you make a choice. Here's what you need to know.

An old dog learning new tricks

TransAlta owns utility assets throughout Canada and the United States. That said, one of its key investments is a 61% ownership stake in TransAlta Renewables (TRSWF 0.51%). This entity owns 42 renewable power assets, including solar, wind, and hydroelectric, capable of producing roughly 2.4 gigawatts of power. Renewable energy sources like these are expected to be the future of electricity generation.

A man working on an electrical pole

Image source: Getty Images

But unfortunately, there's more to consider here. For starters, roughly 40% of TransAlta Renewables' power is actually natural gas, so it's not quite as pure a play on the renewable space as management would like you to believe. And then there's the pesky issue that this renewable play is just one investment in parent TransAlta Corporation's portfolio.

When you pull back and look at TransAlta Corporation's full ensemble of assets, only about one third of its power generation is renewable. The rest comes from natural gas (43% of generation) and coal (25%). Although much of the power it produces is protected by long-term contracts, it is still very much in the process of shifting toward newer technology and clean energy -- and it still has a long way to go. And while it's doing that, it's also trying to reduce its debt levels, a move that will likely make the clean power transition a little slower.

There's nothing inherently wrong with what TransAlta Corporation is doing. It's simply working to change along with the industry in which it operates while maintaining financial discipline. But with so much carbon-based generating capacity, it could be a long process, one which probably isn't worth bothering with for most investors. That's particularly true when the only reward for sticking it out is a modest 2% yield.

Check out the latest earnings call transcripts for the companies we cover.

At the head of the pack

This is why most investors, particularly more interested in income, would be better off buying Brookfield Renewable Partners. The first appealing element is clearly the partnership's 6.7% distribution yield. But then there's the simple fact that all of Brookfield's power is renewable. It doesn't need to transition to new technology, it's already there.

BEP Total Return Price Chart

BEP Total Return Price data by YCharts

OK, that's actually a bit of an overstatement: Roughly 75% of the partnership's power capacity is hydroelectric. That's one of the oldest and most reliable sources of renewable power on the planet, and it's the foundation on which Brookfield is expanding into the solar and wind spaces. Brookfield Renewable is working to get into new technology, but it's making use of arguably the best of the old energy industry to do it.

There's a long way to go before solar and wind rival hydro in Brookfield's portfolio, but that just means there's a very long runway for growth. And it's making aggressive moves to get there, like buying TerraForm Global in 2017 and acquiring a controlling stake in that company's sibling TerraForm Power, a position it augmented in mid-2018. These two investments materially increased Brookfield's power diversification and further expanded its portfolio globally.

Today it has around 17.4 gigawatts of power across 15 countries. And every new investment simply makes Brookfield an even bigger player in the renewable power sector. That said, much of the partnership's growth from here is likely to come from ground-up construction and not big, direction-changing acquisitions. For example, it currently has 151 megawatts of power projects in the works through 2021 that are projected to add $15 million to its funds from operations. It has another 208 megawatts worth of projects lined up behind that, which it believes will boost funds from operations by $28 million.

The total addition to funds from operations from these investments will be modest, at just a couple of percentage points. However, when added to its long-term contracts -- which contain price escalations -- you start to get solid mid-single digit growth numbers to back the partnership's long-term goal of 5% to 9% distribution growth over time. If you are an income investor looking to put some money to work in renewable power, Brookfield Renewable Power is a much better option than TransAlta Corporation.

More than just a yield

Sure, you could have looked at the yields of Brookfield Renewable Power and TransAlta Corporation and simply gone with the higher yield. But it's the story behind those yields that really makes Brookfield Renewable Power the more compelling investment option. Why suffer through an old-school, low-yielding power company's transition toward renewable power when you can own a high-yield partnership that is already focused on renewables? That includes a solid foundation built on hydroelectric power, one of the oldest and most reliable sources of clean energy known to man. Once you understand the backstory here, it's a pretty simple choice to pick Brookfield.

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Stocks Mentioned

Brookfield Renewable Partners L.P. Stock Quote
Brookfield Renewable Partners L.P.
$34.66 (3.25%) $1.09
TransAlta Corporation Stock Quote
TransAlta Corporation
$11.34 (3.37%) $0.37
TransAlta Renewables Inc. Stock Quote
TransAlta Renewables Inc.
$13.70 (0.51%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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