Brookfield Renewable Partners (BEP 0.19%) is a large and diversified developer of clean energy. It offers investors an attractive 4.5% yield, and it has increased its dividend annually for more than a decade. But there's a key aspect of its business that investors need to understand, and a bull market would likely help a lot.
What does it do?
There are really two parts to Brookfield Renewable Partners' business. Part one is the partnership's current operating portfolio of assets with capacity to produce 32 gigawatts of clean energy. The assets backing this are spread across various clean energy markets. The core is the hydroelectric business, which made up 53% of cash flows in 2022. This is a highly reliable technology with a long operating history, and it's suitable for base-load power because it is, basically, constantly running. It's the foundation on which Brookfield Renewable has built the rest of its clean energy portfolio.
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The other business lines within the current operating portfolio are wind (20% of 2022 cash flows), utility scale solar (15%), and distributed energy and sustainable solutions (12%). This collection basically rounds out the portfolio to include almost all of the other sources of clean energy you'd likely want to have exposure to in your portfolio.
On top of the diversification across clean energy production techniques, Brookfield Renewable is also diversified geographically. North America makes up the lion's share of cash flows, at 62% in 2022. Behind that was South America (20%), Europe (16%), and Asia Pacific (2%). Most of these assets are backed by long-term power supply agreements, with the average remaining contract life at roughly 14 years. These contracts include escalators that are expected to increase funds from operations (FFO) by 2% to 3% a year.
That's a solid business that underpins Brookfield Renewable's distribution and 4.5% yield. However, there's another material part of the business that has been vital in its effort to live up to a key investor promise -- annual dividend growth between 5% and 9%.
Building it from the ground up
The second part of Brookfield Renewable's business is developing renewable power projects. It has a pipeline of projects with estimated generation capacity of 132 gigawatts, which is a huge runway for growth. Indeed, that figure is more than four times larger than the partnership's current capacity. Building clean energy assets costs money.
Brookfield Renewable's units are down about 40% since their 2021 peak. That's not good news, but it was largely driven by a shift in investor sentiment with regard to clean energy. Brookfield Renewable is still executing quite well, overall. For investors, it looks like an opportunity to buy the stock at a more attractive price point. But it also means that selling units is a bit more expensive as the partnership looks to build new assets (more units need to be sold to generate the same amount of cash and more units require more cash to be put toward distribution payments).
Still, a bull market should make capital easier to access. That will, prominently, include selling units. However, Brookfield isn't only selling units to fund its growth. It issues debt, which should be easier to do in a bull market, too.
It also partners with its General Partner, Brookfield Asset Management (BAM 1.87%). That company takes in capital from others and puts it to work where it believes the best opportunities are. The more capital Brookfield Asset Management has, the more will likely flow through to Brookfield Renewable's investment pipeline.
In other words, a bull market should make it easier for Brookfield Renewable to continue to expand its portfolio. The goal is for capital investment to support 3% to 5% of annual FFO growth. There's no particular reason to expect the partnership to fall short on that, particularly if spirits are high on Wall Street.
Core to the story
On top of these two core business efforts, Brookfield Renewable layers on acquisitions (up to 9% of FFO growth). Although acquisitions are unpredictable, issuing stock and debt are important on that front, too. So, when you step back, access to capital is very important for this clean energy growth story. A bull market would make that access easier. That's a win for the partnership and a win for shareholders.
