Shares of Brookfield Renewable (BEP 1.19%) (BEPC 1.79%) have been scorching hot in 2020, surging a market-crushing 70%. That rally probably has investors wondering if shares of the leading renewable-energy producer are still worth buying. Here's a look at the pros and cons of buying now.
The case for buying Brookfield Renewable Partners
Brookfield Renewable has done a fantastic job creating value for its investors over the years. Since its inception nearly two decades ago, the company has generated an average annualized total return of 18%. That has obliterated the S&P 500, which has only produced an average annualized total return of 6% during that period. Thus, it has hardly ever not been a good time to invest in this company.
Meanwhile, the future looks even brighter than the past. Given the rapid shift toward renewable energy and the steep decline in costs, Brookfield estimates it can grow its funds from operatoipns (FFO) per share at a 10% to 16% annual rate through 2025. Powering that forecast is the company's efforts to increase the cash flow of its legacy assets, its extensive development project pipeline, and anticipation that it can continue completing value-enhancing acquisitions. At the midpoint, it's on track to grow FFO at a faster pace than the roughly 10% annual rate it has achieved over the past decade. Meanwhile, add in its 3.1%-yielding dividend, -- which Brookfield expects to grow at a 5% to 9% annual rate -- and its total annual returns could be in the mid-teens over the next five years, assuming it maintains its current valuation.
It's also worth noting that Brookfield has a top-notch balance sheet, which gives it the financial flexibility needed to build out its pipeline and make acquisitions. Furthermore, it has an excellent track record of recycling capital by selling mature assets and reinvesting the proceeds into higher returning opportunities. Finally, it has had a knack for making value-creating acquisitions. These factors increase the probability that Brookfield can deliver on its forecast.
The case against buying Brookfield Renewable Partners
If there is one concern with buying Brookfield these days, it's valuation. After surging 70% in 2020, shares of Brookfield currently trade at around $63 per share. With the company on track to generate roughly $2.50 per share of FFO, it sells for about 25 times its cash flow.
On one hand, that's quite a bit more than the roughly 15 times FFO it traded at entering this year. It's also a bit more expensive than some of its dividend-focused renewable energy peers. For example, Clearway Energy (CWEN -0.92%) (CWEN.A -0.67%) expects to generate $1.54 per share of cash flow this year. With its stock trading at around $29 apiece these days, Clearway fetches about 19 times cash available for distribution (CAFD). Similarly, Atlantica Sustainable Infrastructure (AY -1.80%) expects to generate between $200 million to $225 million of CAFD in 2020. With a $3.5 billion market cap, that forecast implies Atlantica trades at about 16.5 times cash flow at the midpoint.
However, while Brookfield trades at a premium price, it's not without merit. For starters, it has a long history of creating value for investors. On top of that, renewable energy is becoming more valuable as the global economy accelerates its transition away from fossil fuels. That means there could be even more opportunities for Brookfield to invest in high-return projects in the future, which could enable it to outperform its plan.
A great business at a fair price
While Brookfield isn't a bargain these days, it's not selling for an unreasonable price, given its track record and growth outlook. It still seems worth buying even at the current level. While it might not generate annualized total returns in the high teens, it still looks likely to beat the market from here.