First Solar (FSLR 2.07%) has long been one of the most profitable manufacturers in the solar industry and had a formidable balance sheet that most competitors envied. And that trend continues to this day.
But what was a valuable war chest in the 2010s may have become excess cash in 2021. First Solar has sold off most of its solar project development business, no longer has a project ownership arm, and has reduced the scope of its products to primarily solar panels. At the same time, solar manufacturing has become more mature, with solar panel prices stabilizing as manufacturers reach economies of scale, meaning there's less disruption year to year.
Given the shrinking scope of First Solar's business, this solar energy stock may be sitting on far more cash than it needs, and it could be a great dividend payer for investors.
Image source: First Solar.
Expansion costs come down
First Solar expects to have a net cash balance of $1.8 billion to $1.9 billion at the end of 2021, and that's a big cushion for a company expecting less than $3.0 billion in sales. But what's striking about the cash balance is how big it is against First Solar's investment opportunities.
I highlighted above that First Solar has divested most of the vertically integrated parts of its business, leaving mainly solar panel manufacturing. And this is a mature, cash-generating business. In 2021, management expects to generate $545 million to $640 million in operating income. So, the business should be spitting off a significant amount of cash each year.
One use for cash could be expanding manufacturing to grow the business. With shipments expected to reach 7.8 gigawatts (GW) to 8.0 GW in 2021 out of a total solar installation market of up to 209 GW globally, there could be an opportunity to expand. But outside of capital expenditures, First Solar doesn't have clear uses for its cash.
Capacity expansion is coming
Given the huge market and opportunity to grow capacity, management has announced a $680 million plan to expand capacity by 3.3 GW in the U.S. That's the biggest single expansion for the company, but it also shows how much more efficient First Solar has become.
When it announced an upgrade to equipment in 2016, management said it would cost $1 billion to upgrade 4 GW of equipment. This was an upgrade cost of $0.25 per watt -- and that was only an upgrade and didn't include building a new facility.
In 2021, a new facility will cost an estimated $680 million for 3.3 GW, or $0.21 per watt. Equipment costs per GW will presumably be significantly lower than just five years ago.
Cash continues to pile up
As I mentioned, First Solar has a lot of cash and should be adding to that pile with cash from operations. While predicting cash from operations can be tough, we know that First Solar is predicting $592.5 million in operating cash this year at the midpoint of guidance. After pulling out start-up costs and a one-time asset sale gain, that's about $525 million in ongoing operating income.
If we assume that's the amount of cash the company generates each year, the company will have $2.22 billion in cash at the end of 2023. And in 2024, when the new manufacturing plant comes online, it'll generate more cash. Below, I've estimated that cash generation per watt is the same at the new plant.
| Item | Cash |
|---|---|
| Starting cash (EOY 2021) | $1.85 billion |
| Est. 2022 operating CF (8 GW) | $525 million |
| Expansion spend | ($680 million) |
| Est 2023 operating CF (8 GW) | $525 million |
| Est 2024 operating CF (11 GW) | $725 million |
| End 2024 cash | $2.95 billion |
Note: Calculations by author.
While these are only estimates, they show that First Solar's cash pile is likely to grow even as it builds a new manufacturing plant that will ramp up production in 2023.
Given that First Solar has shrunk its business to focus on manufacturing, it has few options for growth. And even if it decided to increase capacity, it would likely have excess cash on the balance sheet. That's why I think it's time for First Solar to consider returning some of that cash to shareholders. This could be the first major solar manufacturer to be a great dividend stock, and given the company's history of cash generation, I think that would be a great move for investors.
