A little over a year ago, I selected TerraForm Power (TERP) as my top renewable energy stock for 2019. It turned out to be a solid pick. While the wind and solar energy producer's shares weren't quite as hot as those of some solar stocks, it still delivered market-beating total returns. Overall, shares of TerraForm gained 37% in 2019. Add in its high-yielding dividend, and the total return approached 45%. That easily outpaced the equally red-hot S&P 500, which produced a 31% total return in 2019.
While TerraForm likely won't deliver quite such strong returns in 2020, the company has plenty of market-beating potential. Here's a look back at what went right in 2019 and why that has TerraForm set up for success in 2020 and beyond.
A banner year on many fronts
TerraForm Power entered 2019 in its best position in years. Thanks to the help of its new sponsor, Brookfield Asset Management (BN 0.56%) -- which bought a controlling stake in late 2017 -- the company made excellent progress on its transformation plan throughout 2018. Highlights included buying Spanish wind and solar power company Saeta Yield for $1.2 billion, signing agreements with vendors to reduce costs, and reinstating a high-yielding dividend.
The company built on that success throughout 2019 by continuing to improve the profitability of its legacy assets while at the same time expanding its portfolio and bolstering its financial profile. The company's moves to enhance its earnings helped grow its cash flow per share by 14% through the third quarter. Meanwhile, it acquired a 320 megawatt (MW) portfolio of solar assets in the U.S. for $720 million and made several financing transactions to improve its balance sheet. Because of that, TerraForm enters 2020 with lots of momentum.
Why 2020 could be another excellent year for TerraForm Power
TerraForm's most recent acquisition will help drive cash flow growth over the next few quarters. On top of that, the company will continue benefiting from its margin enhancement efforts. Those two factors set TerraForm up to continue growing its cash flow at a healthy rate in 2020. Because of that, it's in a solid position to deliver on its goal of increasing its dividend by 5% to 8% per year.
Meanwhile, the company is working on ways to add more power to its 2020 growth plan by pursuing additional opportunistic acquisitions. TerraForm already has a transaction in the pipeline to acquire 100 MW of solar in Europe that it expects to close during the first quarter. On top of that, it has a 50 MW pipeline of solar acquisition opportunities in Spain that it's pursuing. Further, it also has the potential to buy out some of its minority partners, and it holds the right of first offer on several other acquisition opportunities. Because of that, 2020 could be another busy year for TerraForm on the M&A front. That sets the company up to potentially grow its payout at the top end of its target range not only in 2020, but also in future years.
Another possible catalyst for TerraForm in 2020 is additional improvements to its financial profile. While the company has a solid balance sheet, its credit rating remains below investment grade, which makes it more expensive to borrow money. However, with a much higher stock price, a red-hot renewables market, and lower interest rates, TerraForm could make additional moves to improve its credit profile. Doing so would enhance the company's long-term sustainability, which should boost shareholder value.
Set up for another strong year
TerraForm Power is coming off an excellent year. Because of that, it has lots of momentum heading into 2020 since its recent acquisitions and margin enhancement initiatives position it to grow its cash flow and dividend toward the top end of its target range. As such, the company could potentially generate a total return in the low to mid-teens this year, making it one of the top renewable energy stocks to buy for 2020 as well.