Atlantica Yield (NASDAQ:AY) likely isn't near the top of the list when investors think about renewable energy stocks. That could be because the bulk of the U.K.-based company's portfolio is outside of the U.S. It also doesn't help that the company has generated a total return of negative 16% since coming public in 2014. Meanwhile, investors are also probably still trying to get used to its new name following its rebranding after a disastrous first couple of years.
While the company has struggled in the past, though, it appears to have a much brighter future. That's why income investors won't want to continue overlooking Atlantica and its 6.7%-yielding dividend.
Atlantica Yield 101
Atlantica Yield is a sustainable infrastructure company. It currently operates about two dozen assets focused on generating and transmitting electricity as well as water infrastructure. Renewable energy is the largest portion of its portfolio at 68% of cash flow. It operates solar projects in the U.S., Spain, and South Africa, wind farms in Uruguay, and a mini hydro facility in Peru. In addition, it operates a cleaner-burning natural gas power plant in Mexico, which supplies it with another 14% of its cash flow.
The company also has interests in several electrical transmission lines in Peru and Chile and stakes in two water desalinization plants in Algeria. These assets supply 14% and 4%, respectively, of its cash flow.
Atlantica Yield has long-term contracts in place for 100% of the capacity of its assets. Those agreements provide it with predictable cash flow, about 80% of which it pays out via the dividend.
The other thing worth noting about Atlantica Yield is that Canadian energy company Algonquin Power & Utilities (NYSE:AQN) is a major investor and strategic partner. Algonquin initially bought a 25% stake in Atlantica in 2017 but has since boosted its interest up to 42.3%. It could further increase its position to 48.5% as it assists Atlantica in funding its growth opportunities.
What lies ahead for Atlantica Yield
Atlantica currently expects to grow its dividend per share at an 8% to 10% annual rate through 2022. It has four visible sources to drive this growth.
First, the company can organically expand its existing assets. Projects could include repowering its wind farms by replacing older turbines with newer, more powerful ones. Second, the company's relationship with Algonquin allows it to participate in expansion projects as well as acquire assets directly from its strategic partner. For example, it can invest up to $50 million into the Sugar Creek wind farm that Algonquin is developing in the U.S. Third, it can invest in new projects developed by other partners. Finally, the company can make third-party acquisitions.
Overall, Atlantica believes it can invest $200 million to $300 million per year on growth opportunities. That investment rate should be enough to support its dividend growth plan. The company expects to be able to finance this expansion through retained cash flow after paying its dividend, using its strong balance sheet, and additional support from Algonquin.
Atlantica should be able to continue growing at a high rate for many more years to come given the opportunity set in its existing markets. In renewables alone, the global economy will need to invest an estimated $10 trillion in new projects through 2050. In the meantime, the energy industry needs to spend another $3.2 trillion in building more transmission infrastructure to support the growth of renewables over the next decade. On top of that, the global water desalination market is expected to reach $25.8 billion by 2025, while natural gas power will remain a key part of the worldwide energy mix in the mid-term. In other words, Atlantica Yield should have no shortage of opportunities to expand its portfolio in the coming years, which should support continued dividend growth.
A compelling income stock to consider for the long haul
While Atlantica Yield got off to a rough start as a public company, it has started turning things around in recent years. That's evident in the 65% total return it has produced since changing its name and starting a new phase focused on growth that creates value for investors. The company aims to continue this trend in the coming years by investing in high-return opportunities that power fast-paced dividend growth. That strategy could enable Atlantica to keep generating market-beating total returns, making it a compelling opportunity to consider owning.