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Why Brookfield Renewable Will Thrive During a Recession

By Matthew DiLallo - Jan 16, 2021 at 10:35AM

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The renewable energy powerhouse has proven its durability over the past year.

Recessions can be brutal for investors. As the economy weakens, companies earn less money, which weighs down stock prices.

Some companies can better weather these economic storms than others. One built to prosper during tough times is renewable energy juggernaut Brookfield Renewable (BEP 1.28%)(BEPC 0.35%). Here's why it can thrive during a recession.

Wind turbines on the top of a mountain with fog below.

Image source: Getty Images.

Fortified cash flows

When the economy starts to soften, people and companies pull back on spending. As a result, pricing and demand for many goods decline, impacting revenue and earnings for many businesses.

However, Brookfield Renewable's business model makes it nearly immune to a weakening economy. It sells most of the power it produces to end-users under long-term, fixed-rate power purchase agreements (PPA). These PPAs have an average remaining term of 14 years and lock in 92% of its cash flow. The company has a highly diversified customer base of nearly 600 primarily investment-grade public power authorities and utilities. Meanwhile, many PPAs have inflation-linked escalators, meaning Brookfield can increase its rates even if market prices decline. Those features provide Brookfield with a rock-solid revenue stream.

A fortress-like balance sheet

Brookfield Renewable complements its stable revenue profile with a top-notch balance sheet. The company has a BBB+ credit rating, which is the highest in the renewable energy sector. Meanwhile, it has no material debt maturities over the next five years. On top of that, it had more than $3.3 billion in liquidity -- cash and available borrowing capacity -- at the end of the third quarter.

Brookfield routinely refreshes its liquidity through its capital recycling program of selling mature assets. For example, the company sold a 40% interest in a U.S. renewable energy portfolio and some wind assets in Ireland in the fourth quarter, generating $233 million in cash. Those sales gave it the flexibility to acquire Exelon's (EXC 0.29%) solar energy business.

Highly visible growth

While recessions typically cause earnings to decline for most companies, Brookfield's usually keep growing. Why? First, as previously mentioned, the company's contract profile enables it to generate steady cash flow. Meanwhile, about 40% of its revenue has embedded growth due to inflation escalators. On top of that, it currently sells a significant portion of its power at below-market prices. As existing contracts expire, it can sell that power at higher market prices. They should hold up even during a recession because, thanks to climate change concerns, renewable energy is becoming increasingly valuable compared to power produced by fossil fuels. Brookfield also believes that its steadily growing scale will enable it to keep pushing down costs. Those reductions will likely be higher during a recession. Add it all up, and Brookfield believes it can grow the cash flows of its existing assets by 3% to 6% per year regardless of market conditions.

In addition, Brookfield has an extensive pipeline of development projects backed by long-term PPA. That gives it highly visible cash flow growth, which it estimates will average 3% to 5% per year as it completes new projects. Brookfield envisions 6% to 11% annual growth in good times and bad.

Finally, thanks to its top-notch balance sheet, Brookfield has the financial flexibility to take advantage of investment opportunities that arise during recessions. The company can often acquire assets from financially strapped operators at excellent values, since there are typically fewer bidders. That ability to capture growth when others must retreat enables Brookfield to prosper during economic downturns.

A great stock to hold when a recession hits

Brookfield Renewable has built its business to thrive during recessions. It has a low-risk business model centered around generating stable cash flow backed by long-term contracts. It complements that with a top-notch balance sheet that gives it the financial flexibility to continue growing when times get tough. Add in a well-supported dividend, and Brookfield Renewable is an ideal stock to buy when recessionary storm clouds start forming.

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Stocks Mentioned

Brookfield Renewable Partners L.P. Stock Quote
Brookfield Renewable Partners L.P.
BEP
$37.09 (1.28%) $0.47
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$49.16 (0.29%) $0.14
Brookfield Renewable Corporation Inc. Stock Quote
Brookfield Renewable Corporation Inc.
BEPC
$37.64 (0.35%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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