As far as dividend hikes are concerned, 2014 will be a hard act to follow. A thumping stock market, powered in no small measure by good underlying company fundamentals, witnessed a great many dividend raises during the year.
That made investors happy, and not only because such increases put more money directly into their pockets. When a firm boosts its distribution, its stock price also tends to see a lift thanks to that additional return, and to the optimism that comes from its shareholders getting richer.
Here's to hoping 2015 is at least competitive with its predecessor in terms of dividend lifts. Before we dive fully into the New Year, though, let's cover one final dividend raise for 2014. It's from an entity that operates in a new and intriguing corner of the stock market.
A Sunny Dividend Policy
Raising its dividend just as last year was waving goodbye was TerraForm Power (NASDAQ:TERP). By improving its quarterly payout by 20% (to $0.27 per share), it enacted the highest raise in its history.
Actually, that's not saying much, as the stock has only been in existence since this past July when it successfully launched on the Nasdaq.
See, TerraForm Power is an offshoot of another company, namely solar energy specialist SunEdison (NASDAQOTH:SUNEQ). TerraForm Power is a "yieldco," short for "yield company" -- an entity that holds the renewable energy assets built by its parent, and distributes the bulk of its cash flows derived from those assets as dividends.
This type of corporate structure is roughly comparable to the master limited partnerships currently in vogue largely in the oil and gas segment, which also distribute much of their take as dividends. The same could be said for real estate investment trusts.
Yieldcos allow companies like SunEdison to separate some of their assets into a separate entity, bringing in a big pile of capital for said assets. TerraForm Power's IPO, for instance, raised around $534 million. Since that's equity capital, in practice it doesn't have to be repaid -- as would a bank loan or a bond issue (although in theory, if the yieldco makes a loss, its payouts are technically classified as return of capital for tax purposes).
TerraForm Power is a very young company, as are yieldcos in general. But as the basis of yieldcos are steady, predictable income streams from energy-generating assets, the cash flow is there. So there have been and should continue to be plenty of dosh for shareholder distributions.
Such appears to be the case for TerraForm Power. In fact, along with its most recent quarterly results the company raised its estimated for cash available for distribution for 2015. This is now anticipated to be just under $156 million, well above the previous projection of $127 million.
The most recently reported quarter saw the firm post a CAFD of a bit over $30 million, which annualizes to roughly $120 million. So if the 2015 projection is reasonably accurate, we're looking at a 30% or so increase in that line item. This would theoretically shake out in further dividend raises.
Payout Power Plant?
But again, in spite of its pedigree as an offspring of SunEdison, TerraForm Power is a baby of a company -- as are the rest of the market's yieldcos. They present an interesting investment case thanks to those cash flows, but it's yet to be proven if they can solidly and consistently beam dividends down to their stockholders. This should very much be kept in mind when considering an investment into the segment.
TerraForm Power's new dividend is to be paid on March 16 to shareholders of record as of March 2. At $0.27 per share on the most recent stock price, TerraForm Power yields 3.7%.