Brookfield Renewable (BEP 0.53%)(BEPC +0.00%) pays a high-yield dividend. At 3.6%, it's more than the S&P 500's dividend yield of 1.3%. Investors might wonder if the renewable energy company can support its high yield. Here's a closer look at Brookfield's dividend.
Crunching the numbers
Brookfield Renewable's current dividend payment is $0.30375 per share each quarter. It has had no problems covering that payout so far this year. Brookfield generated $0.36 per share of funds from operations (FFO) during the third quarter and $1.28 per share through the first nine months. That implies a dividend payout ratio of 84% in the third quarter and 71% for the year. That's not bad, considering that Brookfield Renewable is an income-focused company.
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Two other factors support Brookfield's ability to pay out a significant portion of its cash flow in dividends. First, it has diverse sources of stable cash flow. Overall, it sells 84% of the power it produces to end users like electric utilities and large corporations under long-term contracts. Meanwhile, it operates a globally and technologically diversified renewable energy portfolio. These factors allow it to produce relatively steady cash flow.
Brookfield complements its steady cash flow with a rock-solid financial profile. It has a strong investment-grade credit rating and lots of available liquidity. That gives it additional financial flexibility to support its dividend and expand its portfolio.
A look at what's ahead for Brookfield Renewable's dividend
Brookfield Renewable has a long-term target to grow its payout at a 5% to 9% annual rate. Several factors support that plan.
Brookfield Renewable expects inflation-related escalators on its existing contracts to support 1%-2% annual FFO per share growth. Meanwhile, it sees higher power rates and its growing scale enhancing its margins and adding another 2% to 4% to its FFO per share each year. These organic growth drivers require minimal capital investment from the company.
Brookfield believes it can boost its bottom line by another 3% to 5% each year through its development pipeline. It has a massive 36 gigawatts of projects in the pipeline, providing lots of power to its growth plan. Finally, Brookfield sees M&A activities adding up to 9% of incremental FFO per share each year. Add it all up, and that's the potential for up to 20% annual FFO per share growth. With it expected to grow its dividend at a much slower rate, Brookfield's payout ratio should shrink in the coming years, putting its dividend on an even more sustainable level.
Brookfield estimates that it will need to invest an average of $1 billion to $1.2 billion per year on development projects and M&A to deliver on its growth target or up to $6 billion over the next five years. Given its high dividend payout ratio, retained cash flows will only cover about $300 million of this estimated $6 billion funding requirement. However, thanks to its conservative balance sheet, Brookfield estimates that it can support an additional $2.5 billion of debt and $1 billion of preferred equity while maintaining a top-notch financial profile.
The company sees the balance of its funding requirements (about $2.2 billion) coming from its capital recycling program. Brookfield will sell mature assets and reinvest the cash into higher returning opportunities. For example, the company recently agreed to sell the Mexican assets its global solar energy project developer, X-Elio, has developed for $50 million in net proceeds. That's part of the $250 million of capital it raised from strategic financing and capital recycling activities during the third quarter. This infusion helped fund the roughly $600 million it has invested across several M&A transactions this year. Meanwhile, it has maintained robust liquidity at more than $3.3 billion, giving it the flexibility to continue growing while paying its dividend.
Brookfield Renewable's dividend is on solid ground
Brookfield Renewable is generating plenty of cash to support its dividend. While its high payout ratio leaves less money to fund its expansion, Brookfield has plenty of other levers to finance growth. So the company appears poised to grow its high-yielding dividend at a mid-to-high-single-digit rate over the next few years, making it stand out as a top renewable energy dividend stock.
