The renewable energy industry is starting to break out. With costs coming down and new technologies emerging, the sector appears headed for accelerated growth over the next five years.
One beneficiary of that acceleration will be leading renewable power producer Brookfield Renewable (BEP 3.40%) (BEPC 2.93%). That's evident in the company's updated five-year plan, which forecasts high-powered earnings and dividend growth through at least 2025. Add that visible upside to the company's already high-yielding dividend, and there's good reason to believe it will produce substantial total returns for investors over that time frame.
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An excellent track record of enriching investors
Brookfield Renewable has been an early leader in the renewable energy sector. The company initially focused on hydroelectric power, but in recent years has added more wind, solar, and energy storage platforms to its portfolio via a steady stream of acquisitions and development projects. Those moves have paid off for shareholders as Brookfield has hiked its distribution at an annualized rate of 6% since 2000, which has helped power it too market-smashing total annualized returns of 18%.
Meanwhile, the company has benefited from strong earnings growth over the last decade as its FFO has expanded by a more than a 10% compound annual rate. Powering that strong growth has been a significant increase in renewable energy investment -- the industry has spent $2 trillion over the last five years. That's enabled Brookfield to increase its development spending, and falling costs have helped boost investment returns. Meanwhile, the company has also been able to take advantage of opportunities to acquire assets and businesses that went on the market due to their owners' funding constraints.
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Turning up the power
With the cost of renewable energy falling dramatically, Brookfield and others in the industry anticipate that new project development will accelerate over the next 10 years. The current consensus forecast is that the renewable energy sector will add an average of 10 gigawatts (GW) each of wind and solar generating capacity annually through 2022. That development pace should accelerate between 2023 to 2030 to a rate of 12 GW to 15 GW in new wind additions each year and 18 GW to 20 GW of new solar capacity. Overall, based on this forecast, the renewable energy market will grow at an average annual pace of 15% per year. It also suggests that between $5 trillion and $10 trillion could be invested in new renewable energy projects over the next decade.
With so much growth potential ahead, Brookfield is increasing its annual investment spending target. It now plans to spend between $800 million and $1 billion annually; last year, its outlook was that it would invest about $800 million per year. One of the big drivers of that increase is the company's growing backlog of development projects. It currently has 18 GW of projects in its pipeline, which for perspective, is almost as large as its current operating portfolio of 19.3 GW. A growing share of those projects is solar thanks to a series of development-focused joint ventures and late-stage development acquisitions.
That large backlog gives Brookfield Renewable increasing visibility in its long-term growth prospects. In its view, future developments will add 3% to 5% to its bottom line each year through 2025. On top of that, Brookfield estimates that inflation escalators in its existing contracts and efforts to improve the margins at its legacy operations will enhance its earnings by another 3% to 5% per year. Finally, the company anticipates making $3.7 billion of acquisitions over the next five years (accounting for about 80% of its investment spending), which should add another 4% to 5% in annual earnings. Put it all together, and Brookfield sees its per-share profitability growing by a 10% to 16% annual rate over the next five years, which suggests an acceleration from its 10%-plus yearly growth rate over the last decade. This outlook suggests Brookfield should have plenty of power to meet its target of increasing its payout by 5% to 9% per year. At the current share price, that dividend yields about 4%.
Powerful total returns appear to be ahead
Brookfield Renewable has done an outstanding job of creating value for its investors over the years, and it seems likely that it will continue to do so for at least the next five. Given its current forecast, the company could generate total annual returns averaging between 14% to 20% when adding the current dividend to its projected growth rate. That bright outlook makes it one of the top renewable energy stocks to buy these days.
