Clean energy is increasingly the energy of choice for the world, as governments across the globe look to reduce the use of carbon fuels. That positions Brookfield Renewable (BEPC 2.46%) very well for the future, given that its primary focus is owning and operating clean energy assets. Before you hit the buy button, however, you need to understand a few key facts. These include one very important reason you might not want to invest in the stock today.
Lots to like here
From a big-picture perspective, Brookfield Renewable is positioned incredibly well to participate in a major long-term global shift taking place in the energy sector. That's the story that most investors hear.
But there's a deeper theme that you need to know. Most notably, Brookfield is unique in that it owns a global fleet of hydroelectric power plants, accounting for around 50% of its revenue. That's an older clean energy technology, and growth options are modest relative to other clean energy technologies. But hydropower is highly reliable, even as a baseload power source, and provides a cornerstone for growth efforts in other areas.
Image source: Getty Images.
The real growth is going to come from solar power and onshore and offshore wind power. In fact, Brookfield Renewable has more than 28 gigawatts worth of solar and wind projects in its development pipeline. That's the lion's share of its total of 31 gigawatts of projects.
Of that total, meanwhile, 9% of the projects are under construction, 15% are at an advanced stage of development, and 76% are in the early to mid stage of development. And these projects are scattered fairly evenly around the world. Thus, there's plenty of growth ahead here, largely driven by ground-up construction.
However, Brookfield Renewable isn't just about building new power assets. It generally signs long-term contracts for the production it builds, with agreements that contain annual escalators. Right now the average contract term for the power portfolio is around 14 years. There are variations by region, but the key takeaway here is that its existing assets provide a slow and steady foundation for growth as well. Put it all together, and Brookfield Renewable looks very well positioned in the renewable space.
Some warts to consider
Although there are plenty of reasons to like Brookfield Renewable, no company is perfect. So you need to take a close look at some important negatives before you buy here.
First off, Brookfield Renewable has a debt-to-equity multiple of around 8.2 times. That's a pretty big number, which hints at a major risk. Simply put, the company has long made heavy use of leverage. That's not inherently bad, but leverage can reduce a company's flexibility when things get tough. Right now that's not an issue, given the swift growth and popularity of clean energy. However, should access to capital tighten up for any reason, Brookfield Renewable could find itself paying more attention to dealing with its leverage than to the growth opportunities it has.
The second big reason to worry about Brookfield Renewable is valuation. The positives here are very well known, and its dividend yield is around 3%. The yield on sister Brookfield Renewable Partners (BEP 1.40%), which is structured as a master limited partnership, is about 3.1%. While those numbers are well more than what you could get from an S&P 500 Index fund, they are historically low figures for Brookfield Renewable (note that I used the MLP in the chart below because it has been around longer than Brookfield Renewable Corporation even though they are the same corporate entity). Put another way, Brookfield Renewable looks kind of expensive today.
BEP dividend yield data by YCharts.
The company believes it can grow funds from operations at a 10% annualized rate. That should translate into sizable dividend growth as well. So there is still a reason to like the stock for growth-minded investors. But it looks like Wall Street is, historically speaking, paying a premium for that growth.
The dividend yield isn't the only indication of that, either, with price-to-book-value up at around 2.3 times today after having hovered around 1 for years. The big change here, and with the yield, happened over the past year or two, as investor interest in renewable power has increased. Long-term investors with a value focus should tread with caution.
A great stock, but maybe not a great buy
All in, Brookfield Renewable, whether you buy the MLP or the corporate version of the shares, is a very well-run company that's in an incredible position to keep growing its business. The leverage issue needs to be monitored, but in and of itself, that's probably a manageable issue (particularly when you consider that the company is managed and backed by investment powerhouse Brookfield Asset Management).
The big issue you need to consider is whether or not the valuation is worthwhile given the growth prospects. For more-conservative types and those with a value bias, the answer will probably be no. But investors interested in the renewable power space, and who don't mind paying full price (or, more likely, a bit more) for a good company, might find that it's a good fit.
Just go in knowing that a lot of good news has been priced in here, and any short-term headwinds could result in some notable stock price volatility.
