Brookfield Renewable (BEPC 0.09%) (BEP 0.19%) is a cash flow machine. The renewable energy producer generates very stable cash flow backed by long-term power purchase agreements with utilities and large corporate buyers. It uses that cash to pay dividends and grow its portfolio of cash-producing clean energy assets.
That strategy has paid off for shareholders over the years. Brookfield Renewable has consistently beaten the S&P 500:
|
Timeframe |
Brookfield Renewable Annualized Total Return |
S&P 500 Annualized Total Return |
|---|---|---|
|
Last five years |
16.1% |
14.5% |
|
Last ten years |
12.9% |
12.2% |
|
Since its formation in 2011 |
13.1% |
12.9% |
Data source: Ycharts.
The renewable energy stock is in an excellent position to continue beating the S&P 500. Here's what powers that bullish view.
Rapidly rising cash flow
Brookfield Renewable produced $840 million, or $1.29 per share, of funds from operations (FFO) during the first nine months of last year. That was a 7% increase in its cash flow compared to the prior year period. Brookfield used the bulk of that cash to pay its big-time dividend (currently yielding 4.8%). It retained the rest to help fund its continued growth while maintaining a strong balance sheet.
The company expected a deluge of cash flow during the fourth quarter, powered by three recently closed acquisitions. Those deals would help push its FFO per share up by more than 10% for the year.
That would continue the strong growth in Brookfield's cash flow. Over the past decade, the company has increased its FFO per share by more than 10% annually. That has helped power 6% compound annual dividend growth during that period. That income and cash flow growth combination has helped power Brookfield's market-beating total returns.
Plenty of power to continue growing briskly
Brookfield doesn't expect its cash flow growth machine to slow anytime soon. It sees a quartet of catalysts powering more than 10% FFO per share growth for the next several years:
Image source: Brookfield Renewable.
As that slide shows, Brookfield expects its existing assets to grow their cash flow by 4% to 7% per year, powered by inflation-linked rate increases and margin expansion. Meanwhile, the company expects to reinvest its retained cash flow into high-return development projects, powering another 3% to 5% in annual FFO per share growth. On top of that, the company anticipates that M&A activities could add more than 9% to its cash flow per share each year. The company expects to fund new investments by recycling capital (selling mature assets and reinvesting the proceeds into higher-returning investments).
Brookfield has no shortage of investment opportunities. While shareholders of an acquisition target recently voted against Brookfield's offer, that hasn't dimmed the company's growth outlook. CEO Connor Teskey commented in the press release following that vote:
We are seeing plentiful opportunities to deploy capital at or above our target returns, as demand for clean power from corporations continues to accelerate and access to capital is becoming increasingly scarce for some market participants. We remain confident that we will deploy at least $7 to $8 billion of equity capital into growth over the next five years, consistent with our targets. Specifically, our plan to accelerate the transition of Origin has generated significant interest from similar businesses around the world, who are seeking a capital and operating partner to enhance the value of their businesses by accelerating their transition.
Brookfield's growing cash flow will enable it to continue increasing its high-yielding dividend. It's targeting to raise that payout by 5% to 9% per year.
The power to continue beating the S&P 500
Brookfield's business model generates very predictable cash flow, giving it the funds to pay an attractive dividend and invest in its continued growth. With its payout currently yielding more than 4% and its earnings expected to rise by more than 10% annually, Brookfield should have the power to produce a total annualized return in the low-to-mid teens in the coming years. That puts it in a strong position to continue beating the S&P 500, making it a great stock to buy.
