Brookfield Renewable (BEP 1.20%) (BEPC 1.16%) has gone on a monster run over the past year. Since the start of 2020, the renewable-energy producer has generated a more than 90% total return. That means its valuation might be starting to get a little bit overheated, considering that it only grew its cash flow per share by 23% last year. 

That likely has investors wondering if Brookfield Renewable is a buy. Here's a look at the bull and bear cases for the renewable-energy giant.

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

Image source: Getty Images.

The bull case for buying Brookfield Renewable

Brookfield believes we're just in the early innings of the global energy transition from fossil fuels to renewable energy. The company noted on its fourth-quarter conference call that it sees a $100 trillion investment opportunity in renewables over the next three decades. Furthermore, the company believes it's ideally positioned to capture a large slice of that pie thanks to its "size, scale across multiple technologies, and depth of operating and development expertise." It therefore believes the "prospects for the growth of our business are better than they have ever been." 

Brookfield estimates that it can grow its cash flow per share at an 11% to 16% annual rate through at least 2025, powered by the following factors:

  1. Embedded inflation escalators in existing contracts should add 1% to 2% to its bottom line each year.
  2. Margin expansion activities such as leveraging its scale to reduce costs and selling renewable power at higher rates as existing contracts expire should add another 2% to 4% to its annual cash flow per share.
  3. Its extensive pipeline of development projects should add 3% to 5% of incremental earnings growth per year.
  4. Additional acquisitions should boost its bottom line by 4% to 5% per year.

Brookfield has a massive pipeline of development projects to help power its growth. At the end of 2020, it had 23 gigawatts (GW) of projects in various stages of development, which is more than its current 19.4 GW operating portfolio. On top of that, Brookfield has a top-tier balance sheet to fund those projects and make additional acquisitions. It should have no problem achieving its outlook, which should give it the power to grow its 4.3%-yielding dividend at a 5% to 9% annual rate.

Assuming the market continues to give Brookfield a premium valuation, it could generate total annual returns in the range of 15% to 20% per year when adding its yield to its earnings growth potential.

The bear case for Brookfield Renewable

The biggest drawback with buying Brookfield Renewable right now is its valuation. Units of Brookfield Renewable Partners currently trade at around $46 apiece, while Brookfield Renewable Corporation shares fetch more than $48.50 apiece. With the company generating $1.52 per unit of normalized funds from operations (FFO) last year, the partnership sells for 30 times FFO while the corporation is even pricier at 32 times FFO. While they're a bit cheaper based on 2021's earnings growth projection, Brookfield isn't the bargain it was heading into 2020.

On one hand, it's reasonable to pay 30 times earnings for a company that could grow by as much as 16% per year for the next five years. Further, it's not hard to justify paying a premium for Brookfield, given its historical track record of creating value, top-tier balance sheet, and growth prospects in a fast-growing sector like renewable energy. Meanwhile, Brookfield could take advantage of its premium valuation by using its stock as currency to make value-accretive acquisitions, enabling it to grow earnings even faster.  

However, highly valued stocks can quickly lose their luster during a stock market sell-off. Meanwhile, if the renewable energy market cools off or Brookfield grows at the lower end of its target range, it could affect the premium investors are willing to pay for the stock. If that happens, it might not generate market-beating total returns.

Worth the price of admission

There's no doubt that Brookfield isn't the value stock it was at the beginning of 2020. However, it's leading the charge to transition the global economy to renewable energy. It has extensive operational expertise and a nearly unmatched development pipeline, which should enable it to grow shareholder value over the coming years as the pivot toward renewables accelerates. It still looks like an excellent buy for the long term.