Brookfield Renewable (BEP 1.10%)(BEPC +0.00%) has two share classes. At their current prices, its partnership shares offer a 4.9% distribution yield while its corporation shares have a yield of 4.3%. Both are attractive yields given that the S&P 500 on average yields a scant 1.3% today. While Brookfield Renewable is an attractive income stock option, you need to go into an investment in it understanding that it isn't exactly run like most companies. And there's an important factor that sets it apart in a good way.
The foundation of the business
The first thing you need to know about Brookfield Renewable is that it is operated by Brookfield Asset Management (BAM +0.00%). It is, basically, a funding vehicle that allows investors to invest alongside Brookfield Asset Management in the renewable power space. That's neither good nor bad on its own, but it does change the dynamics of the story.
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In fact, there are two share classes for Brookfield Renewable for the very reason that it allows the company to appeal to more investors. Originally, it only listed partnership units, but many institutional investors are barred from owning partnerships. So Brookfield introduced the more traditional corporate structure as a way to gain access to institutional investors (and small investors who didn't want to own partnerships). The two share classes are basically the same in all other respects, but demand from institutional shareholders has resulted in a yield disparity.
Brookfield Asset Management, as its name makes clear, is an asset management company. It has a long history of investing in infrastructure, and on a global scale. But asset management companies tend to look at themselves differently than an operating company would. The big difference is their willingness to buy and sell assets. While an electric utility, for example, might take a long time to decide whether or not to sell off a division, Brookfield Asset Management's approach to acquiring and running business units specifically involves the expectation of an eventual exit.
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Key Data Points
In fact, Brookfield Renewable expressly states that its approach is to acquire assets, operate them and enhance their value, and then recycle them. To put that into investor lingo, the company buys energy assets that it thinks are cheap, tries to make them more valuable, and then sells them when they have appreciated in value.
Asset recycling is a big issue for Brookfield Renewable shareholders
In the company's Form 20-F from 2023 (the same as a 10-K, but for foreign companies), it stated that it "[c]ontinued to execute our asset recycling initiatives generating $800 million ($500 million net to Brookfield Renewable) over the past 12-months generating nearly three times our invested capital and providing funds for growth" In a recent presentation, it highlighted three different asset recycling moves it had made of late, from a $1 billion sale to one for just $150 million.
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Key Data Points
Selling assets is a core part of the story, and that notably helps the company make new investments by reducing its need to sell shares or issue debt. But this approach also impacts the way investors should look at the company. It is not a utility like Southern Company or Duke Energy that owns a core set of assets that it will likely never sell. (Though notably, Duke recently sold commercial renewable assets to Brookfield. Its core regulated utility operations, however, were not a part of the deal.)
In short, Brookfield Renewable should probably be thought of as resembling a mutual fund that invests in clean energy rather than a traditional operating company. It just doesn't operate like a utility even though it owns utility-like assets. That's not a bad thing, and some might in fact view it as a good thing. But the Brookfield Renewable that exists a decade from now will not be the same as the Brookfield Renewable we see today because of the buying and selling of assets that will take place over that period.
Actively managing the portfolio of assets can increase risk to some degree, given Brookfield Renewable is likely selling strong assets to buy weaker ones (that it hopes to improve over time). However, it increases potential returns for investors because management is, effectively, harvesting the improvements on its past investments so it can use the increase in value toward buying new investments. Or, put another way, it's compounding the profits it creates for investors. And, as noted, this allows Brookfield Renewable to grow without the need to dilute shareholders with massive stock issuances or to leverage up the balance sheet to untenable levels.
Know what you own with Brookfield Renewable
If you are looking for a clean energy investment, Brookfield Renewable should be on your list, particularly if you are an income-focused investor. However, open your position knowing that it is run by an asset management company and operated like an investment company. Its growth over time will come from both buying and selling clean energy assets, not just buying and running them. That's a very different story than you'll find at a regulated utility, and it means you probably shouldn't compare Brookfield Renewable to regulated utilities, despite its focus on returning cash to investors via reliable and growing dividends.
