Brookfield Renewable (BEPC -1.57%) (BEP -2.52%) had an odd year in 2021. On the one hand, the renewable energy producer delivered strong results through the third quarter, growing its funds from operations (FFO) by more than 20% per share. It also made excellent progress on its strategic growth plan, advancing several development projects, securing new ones, and making a few more acquisitions.

Despite all those positives, shares of Brookfield Renewable tumbled last year. Because of that sell-off, it tops my list as the most attractive renewable energy stock to buy to start the new year.   

Two construction workers walking near solar energy panels.

Image source: Getty Images.

A compelling valuation for a growth stock

The slump in Brookfield Renewable's stock over the past year has it trading at its lowest valuation in quite some time. With FFO per share growing sharply last year, Brookfield Renewable has generated $1.69 of normalized FFO per share over the last 12 months. Given its recent stock price of around $35 per share, Brookfield Renewable trades at less than 21 times FFO.

That seems dirt cheap for a company growing as fast as Brookfield is these days. The company highlighted its growth prospects at its Investor Day last September. It noted four growth drivers:

  1. Inflation escalation: It can increase the rates on its existing power sales contracts by at least the inflation rate. This factor should drive 1% to 2% annual FFO per share growth -- though, with inflation running hot these days, there's the potential for more.
  2. Margin enhancement: Brookfield sees its growing scale helping reduce costs. In addition, rising renewable energy power prices should allow it to lock in higher rates as existing contracts expire. These factors should drive 2% to 4% yearly FFO per share growth.
  3. Development pipeline: Brookfield has a vast and growing pipeline of renewable development projects. The company anticipates its investments to develop additional renewable energy capacity supporting 3% to 5% annual FFO per share growth.
  4. M&A activity: Brookfield believes it can continue to acquire cash-flowing renewable energy assets and late-stage development projects. It sees mergers and acquisitions (M&A) potentially adding up to 9% to its FFO per share each year.

Put it all together, and Brookfield Renewable sees the potential of growing its FFO per share by up to 20% per year through 2026. The company noted it has already secured at least 8% annual FFO per share growth thanks to the first three growth sources. That gives it increasing confidence that it can grow its FFO by a more than 10% annual rate over the next several years. 

A stock trading at about 20 times FFO that it's growing at more than 10% per year seems undervalued, especially given the increasing pivot toward renewable energy.

A high-quality, high-yield dividend

The other thing that last year's sell-off in Brookfield Renewable did was push up its dividend yield. It was recently around 3.5%, which is more than double the yield of the S&P 500.

That dividend is on rock-solid ground. Brookfield generates steady cash flow backed by long-term, fixed-price power purchase agreements. Meanwhile, it has a reasonable dividend payout ratio of around 70% of its normalized FFO per share over the last 12 months. In addition, it has a top-notch balance sheet. It has an excellent credit rating, limited near-term debt maturities, and lots of liquidity and access to capital. That gives it ample financial flexibility to continue executing its growth strategy. 

Because of those factors, Brookfield's already attractive income stream will likely continue growing in 2022 and beyond. Its long-term plan is to increase its payout by 5% to 9% per year. That suggests investors will see another dividend hike in 2022. If Brookfield follows its historical pattern, it will likely announce its next increase when it reports its fourth-quarter results in early February. 

A great value this January

Brookfield Renewable's sell-off last year makes it look like an attractive buy to start the new year. The renewable energy giant now trades at a compelling valuation, given the growth that's ahead. On top of that, it offers an even higher dividend yield on a payout set to continue rising. Those factors put it in an excellent position to generate strong total returns in the coming years as demand for renewable energy accelerates.