The market has been in turmoil from the COVID-19 outbreak. However, I've continued to invest during these turbulent times. One area I've focused on is renewable energy, which I think is one of the most compelling investment opportunities of our lifetime.
I'm doing that by building out a basket of renewable energy stocks that I like in hopes that this group will generate significant returns in the coming years. My most recent purchase was ten shares of Atlantica Yield (NASDAQ:AY), which cost around $250. Here's what I like about the company.
Atlantica Yield 101
Atlantica Yield focuses on operating sustainable infrastructure. The company's portfolio consists of the following assets:
- Renewable energy (69% of its revenue): It operates solar plants in Spain, the U.S., and South Africa, wind farms in Uruguay, and a mini-hydro facility in Peru.
- Transmission and transport (15% of its revenue): It owns electric power lines in Peru and Chile.
- Efficient natural gas (13% of its revenue): It operates cleaner-burning natural gas power plants in Mexico.
- Water (3% of its revenue): It owns desalination facilities in Algeria.
All these assets produce stable income backed by regulated rates and long-term, fixed-price contracts. That provides Atlantica with steady cash flow, which it uses to pay a lucrative dividend (I locked in a 6% yield on my purchase price) as well as invest in expanding its portfolio.
What's ahead for Atlantica Yield?
Before the COVID-19 pandemic, Atlantica Yield had a well-defined growth strategy. The company planned to use its retained cash, strong balance sheet, and relationship with utility Algonquin Power & Light (NYSE:AQN) to expand its sustainable infrastructure portfolio. The company had four visible sources of growth:
- Invest in organic expansions, such as repowering its existing wind farms.
- Complete asset drop-down transactions with Algonquin as well as take advantage of co-investment opportunities with its parent.
- Leverage other partnerships by acquiring their interests in existing assets or make co-investments with them on new projects.
- Make third-party acquisitions.
These sources provide a big enough pipeline of opportunities that Atlantica believes it can make $200 million to $300 million of new investments per year. That investment rate could power double-digit annual growth in its cash flow.
The company has already identified its next deal. It signed an option to buy out its partner's interest in Solana, which is a U.S. solar energy project. It has until the end of April to exercise this right, which would cost about $300 million. It had about $400 million in liquidity -- cash and borrowing capacity -- to finance the deal. This transaction would move the needle since it would deliver a double-digit cash flow yield on the purchase price. That implies this Solana investment would generate at least $30 million in annual cash flow for Atlantica, which is already on track to produce between $200 million-$255 million this year.
However, with the COVID-19 outbreak still raging, it's not yet clear if the company will move forward with this transaction or err on the side of caution and maintain its liquidity in case of worsening market conditions. Even if it passes on that option, Atlantica Yield still has enticing long-term growth prospects since it has a large pipeline of other opportunities that it could pursue once market conditions stabilize.
A small bet with a potentially big long-term payoff
Thanks to free stock trading commissions, I'm able to take advantage of all the volatility in the market to put small doses of money to work across several stocks that I think have a bright future. One of those is Atlantica Yield, which I added to my renewable energy basket. It's hopefully the first of many purchases of a company that I think could generate strong total returns as it keeps paying its high-yielding dividend and grows its sustainable infrastructure portfolio.