Shares of renewable-power producer Atlantica Sustainable Infrastructure (AY 2.41%) had a tough 2021. After an incredible 2020, where the company produced a staggering 52% total return -- that's share price gains plus dividends paid -- Atlantica's stock dropped 5.9%, according to S&P Global Market Intelligence. Even when you add in its generous dividend, the total return for 2021 was still a 1.43% loss.
While there wasn't any particularly bad news or a sign of dire trouble for the company this past year, there are a few things that didn't live up to investor hype -- and there are issues on the horizon that could make investors less optimistic in 2022.
I think it's fair to point out that coming into 2021, Atlantica's stock was arguably at an unusually high valuation. Its dividend yield at the beginning of the year was below 4% for the first time in more than five years and well below its average yield of 5.5%. So that could be a case for the tempered enthusiasm for the stock in 2021.
In addition to a high valuation, the company didn't quite live up to expectations. Through the first nine months of the year, the company grew its cash available for distribution per share -- a metric it uses to measure the health of its cash flow -- by 3.4%. Not a bad number, but well below the 5%-8% annual growth target that management has set for the next several years. Also, in the third quarter, it noted that it now expects full-year EBITDA to come in below the low end of its guidance.
It's hard to say what 2022 is going to look like. Atlantica does have some favorable things working for it with a presence in North and South America and select European markets, and it has developed a reputation of developing and acquiring renewable power projects over the years. Conversely, the company does have some weaknesses when it comes to combating inflation and higher interest rates.
For one thing, Atlantica doesn't have an investment-grade debt rating, so higher interest rates will probably have a more detrimental effect on Atlantica than on some of its investment-grade competitors when issuing or refinancing debt. Also, only half of the company's contracts have built-in rate increases that use an index method that would offset inflation; only 37% of its contracts are in fact indexed to inflation.
To make matters even more challenging, the electric power industry hasn't been able to offset inflation in the past. The average cost of power produced has actually gone down since 2010, according to the U.S. Energy Information Administration.
Based on all of these factors and the fact that shares are still trading at a premium to its historical average, I think it's fair to say that investors should temper their expectations for 2022.