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This High-Yielding Renewable Energy Stock Has Lots More Dividend Growth Ahead

By Matthew DiLallo – Aug 4, 2020 at 9:14AM

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A series of strategic moves provide this infrastructure company with more power to deliver sustainable dividend growth.

Atlantica Yield (AY 1.31%) has increased its dividend several times over the past few years. The renewable energy producer recently announced its latest increase, a modest 2.4% raise, which will push its dividend yield above 5.9%. While that's certainly an attractive payout, there's a lot more upside ahead for the company's dividend, making it an intriguing stock for those seeking a steadily rising income stream. 

Sustainable income

Atlantica Yield recently reported its first-half results. While earnings declined by 7.4% year over year, cash flow improved by 2.9%. That's because lower interest expenses more than offset foreign exchange rate fluctuations and weaker results at its solar energy facilities because of less sunshine. Overall, the company generated $97.3 million in cash, which more than covered its $84.3 million in dividend outlays during the first half of the year.

Solar panels and a wind tower with the sun setting in the background.

Image source: Getty Images.

The company's results show the benefit of its diversified portfolio of sustainable infrastructure. As mentioned, its solar assets generated weaker results, which caused its renewable energy production to decline by 10% even though it has increased its production capacity by nearly 4% via recent investments. The company offset this impact due to stronger results from its natural gas power plants and water desalination facilities where both capacity and availability increased, thanks in part to recent acquisitions.

Plenty of power to keep growing

In addition to generating solid results during the first half, Atlantica made excellent progress on its strategic growth plan. In April, the company and some financial partners created a joint venture (Atlantica owns 35%) to invest in Chile's renewable energy sector. The joint venture recently made its first acquisition, buying a 55-megawatt (MW) solar power plant.

Meanwhile, in July, Atlantica exercised its option to buy out its partner's tax equity interest in Solana, a 280 MW solar power facility in the U.S. Atlantica will invest $290 million to complete this deal, with that investment expected to generate a double-digit cash flow yield. That needle-moving growth will help drive its results higher in the second half of the year. 

Atlantica also made excellent progress on financing its business, which included refinancing existing debt at lower rates and raising new capital. Overall, the company raised $489 million, which will finance its joint venture investment, the Solana purchase, and future transactions. 

The company was able to take advantage of lower interest rates to recapitalize its some of its solar assets in Spain, which enabled it to generate some cash while extending its debt maturities. Even with all that financial maneuvering, Atlantica Yield ended the first half with a relatively low corporate leverage ratio of 2.3 times cash flow. That gives it the flexibility to continue funding growth as new opportunities emerge.

A sustainable income stream

Atlantica Yield offers income investors a compelling dividend yield powered by sustainable infrastructure that generates reasonably steady cash flow secured by long-term, fixed-rate contracts. With new assets recently joining its portfolio, cash flow should continue rising. Add in its improved financial flexibility, and it has fuel to continue expanding, which should allow it to keep growing its dividend.

Matthew DiLallo owns shares of Atlantica Sustainable Infrastructure plc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Atlantica Sustainable Infrastructure plc Stock Quote
Atlantica Sustainable Infrastructure plc
AY
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