The global economy is undergoing a massive transition, shifting its primary power source from carbon-emitting fossil fuels to cleaner alternatives like renewable energy. This pivot will take decades and trillions of dollars of investment.
One of the many companies playing a pivotal role in the energy transition is Clearway Energy (CWEN 2.30%) (CWEN.A 2.14%). It's among the largest renewable energy owners in the U.S. and has highly efficient, cleaner-burning natural gas power generating facilities. These assets produce lots of cash to support and grow the company's 3.6%-yielding dividend. It recently made a move that should help power high-end dividend growth through 2026, which pushed it to the top of my list of renewable energy stocks to buy this December.
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Cashing in on demand for district energy
Clearway Energy has agreed to sell its thermal business, Clearway Community Energy, to private equity giant KKR (KKR 3.71%) for $1.9 billion. These district energy operations consist of thermal infrastructure assets that provide steam, hot water, chilled water, and electricity to commercial businesses, universities, hospitals, and governments.
Clearway chose to sell the business and cash in on strong institutional investor demand for these stable energy infrastructure assets. For example, Brookfield Infrastructure (BIP 0.36%) (BIPC 1.21%) sold its North American district energy business in two separate transactions to a group of pension and private equity funds for $4.1 billion. That was one of several district energy deals in the past year involving institutional investors.
Fuel for future growth
Clearway Energy expects to receive $1.3 billion of net cash after closing the sale of its thermal assets. It intends to use that cash infusion to finance the expansion of its renewable energy operations.
The company already has several deals in the pipeline, which will utilize about $620 million of that capital as they close over the next few years. They include the purchase of the remaining 50% interest in a utility-scale solar energy portfolio in Utah and two drop-down transactions with its sponsor, Clearway Energy Group (CEG). Those drop-downs include its co-investment in 1.6 gigawatts of renewable energy projects that should come online through the first half of 2023. It will close those deals in phases as the projects reach commercial operations.
The company intends on deploying the remaining $680 million as additional opportunities arise. It has already identified several potential drop-down investments with CEG, including community solar projects, an expansion of a solar fleet in Texas, and additional wind, solar, and energy storage projects currently under development. Those projects should enter service starting in the second half of 2022 through 2024.
Meanwhile, CEG has an extensive renewable energy development pipeline, providing additional sources of future growth. On top of that, Clearway has the flexibility to acquire clean energy infrastructure assets from third-party sellers. It has already completed several third-party deals, including the remaining 50% interest in the Utah solar portfolio.
Given the company's significant financial resources and vast acquisition pool, it has increased confidence in its long-term growth strategy. Clearway believes it can expand its dividend per share at the upper end of its 5% to 8% annual growth range through 2026. The main driver is higher cash flow per share growth, partly because the company doesn't have to issue new shares to finance acquisitions due to the thermal sale.
Positioned to produce powerful total returns
Clearway Energy was able to unlock some hidden value in its portfolio by agreeing to sell its thermal assets to KKR. That's giving it a cash infusion that it can reinvest in higher returning opportunities, including acquiring additional renewable energy assets. As a result, it now anticipates growing its above-average dividend at the upper end of its target range over the next five years. That increases the probability of producing attractive total returns, making it stand out as a great renewable energy stock to buy this December.
