Dividend investors looking at the renewable power space will most likely come across Brookfield Renewable Partners (BEP 0.34%) and its generous 3.3% yield. That's well more than twice what you would get from an S&P 500 index fund. Brookfield Renewable Partners' distribution has also been increased annually at an average 6% rate for a decade, adjusted for a spin-off. But, before you jump aboard, you should ask yourself: How safe is the distribution?
A one-stop shop
Brookfield Renewable Partners, as its name suggests, invests in renewable power assets. The foundation of its portfolio is a large hydroelectric business, which accounts for roughly half of the master limited partnership's revenues. The rest comes from a mix of wind (22% of revenue), solar (16%), and other assets (the remainder).
It also has a diverse geographic footprint, with operations in North America, Latin America, Europe, and Asia. And roughly 85% of its power is sold under contract, with an average remaining contract life of 14 years. It's basically a one-stop shop for those looking to invest in a diversified renewable power business.
Brookfield Renewable Partners also has material plans for the future. Today it has around 21 gigawatts of power in its portfolio, with a construction pipeline of 36 gigawatts. Basically, it is looking to more than double the size of its business. However, it's important to note that Brookfield Renewable Partners actively manages its portfolio, so it will both acquire new assets and projects and sell completed ones if it believes it can get a good price. The cash from sales is used to help fund future investments.
All of this is in service to the partnership's long-term goal of 5% to 9% distribution growth -- which brings the story back to the distribution and how safe it is.
A closer look at the payout
In the third quarter of 2021, Brookfield Renewable Partners paid a $0.30375 distribution and posted funds from operations (FFO) of $0.33. That puts the distribution at 92% of FFO, a number that looks a little troubling. But that's just one quarter.
If you examine the first quarter of 2021, the FFO payout ratio was 80%. In the second quarter of 2021, that figure was a much healthier 72%. In other words, you probably shouldn't look at a single quarter and make a final call here. As it turns out, the third quarter is a seasonal low point for FFO, so you need to take a longer look and recognize that the payout ratio will fluctuate through the year. Complicating that will be the partnership's active portfolio management, which may lead to temporary fluctuations as assets are bought and sold. The long-term target FFO payout ratio is 70%, but it won't always hit that number.
This means you also need to look at other factors when assessing the distribution. For example, the strength of the balance sheet takes on material importance here, noting that management could need to temporarily support distributions with debt if there's an asset sale. That, however, shouldn't be too big a worry because the balance sheet is investment grade, suggesting Brookfield Renewable Partners has ample access to cheap capital.
Management estimates that it has around $3.3 billion in liquidity, as well. Compare that to the roughly $6 billion of capital investments it plans over the next five years, or about $1.2 billion a year, and there's ample cash around to keep things moving forward. And that liquidity should also allow Brookfield Renewable Partners to support its dividend even as its FFO fluctuates from quarter to quarter, noting that about $2.2 billion in asset sales are expected to help fund the five-year investment plan.
Nothing to worry about
Investors looking at Brookfield Renewable Partners as a way to generate income while also putting money to work in the clean energy space should rest easy. At this point, there doesn't appear to be any reason to worry about the distribution. That said, you'll have to keep an eye on both the FFO payout ratio and the balance sheet, because a single quarter's FFO payout ratio alone won't provide enough information to assess the risks you face.