4 Reasons Brookfield Renewable Partners (NYSE:BEP) Has a Positive Long-Term Outlook

Given that decarbonisation is urgently needed to ensure climate stability, green finance has naturally become a high-growth sector. According to research by Arup and Oxford Economics, it will be a USD 152 billion opportunity by 2050, up 7.2 times from 2020. This underscores the potential of Canadian renewable energy investor Brookfield Renewable Partners (NYSE:BEP), with fish 100 billion USD in AUM (see Slide 5 in the link).

However, despite the potential, the company’s stock has seen disappointing long-term price trends. The price has increased by only 27% in the last decade. In the last five years, the trends are even worse, with the price remaining virtually unchanged, with rotations in between.

The past, however, in the long run, may not be a good indicator of how the future will progress. Here are four reasons why.

#1. The promise of renewable energy

The company, which buys renewable energy assets, enhances their value and then resells them, has a significant portfolio across the green energy spectrum. It has 200 GWh of assets in operation or under development (see chart below). For context, this represents over 5% of global renewable energy capacity in 2023.

If renewable energy capacity continued to expand by 14%, as seen in 2023, by 2030 the absolute number would be 9.7 TWh. If Brookfield were to maintain its current levels of contribution to it, its capacity would increase to 500 GWh by 2030, a 2.5-fold increase over current levels.

This is not inconceivable, especially as growing demand is supported by the policy push towards clean energy sources. For example, the company has 61% of its assets in North America and says it will benefit from policies like the Inflation Relief Act, which provide incentives to the sector.

#2. Revenue and FFO growth

With this as a backdrop, it’s no surprise that the company’s latest earnings report, released last month, is positive. For the first half of 2024 (H1 2024), its revenue grew 17.3% year-on-year (YoY), driven by gains in its wind, solar and sustainable solutions portfolios (see table below) , while hydroelectricity saw a contraction in revenues. due to lower actual production compared to H1 2023.

The company’s earnings measures also rose, albeit to a lesser extent. Adjusted EBITDA rose 5.1%, while its funds from operations (FFO) grew 8.2% year over year. The company attributes this growth to “asset development, recent acquisitions and strong all-in pricing.” As with revenue, all segments save hydro, saw FFO increase.

The company’s prospects also look good. The average of Seeking Alpha’s analyst estimates puts its revenue compounded annual growth rate (CAGR) at 9.1% between 2024 and 2028. This is slightly higher than the previous five-year CAGR of 8.7%. FFO is expected to grow ~10% annually as well (see chart below), with growth penciled in for each of the next five years.

#3. Robust dividend payments

Still, while BEP’s price performance has disappointed over the long term, its total return isn’t bad at 171%, driven by its solid dividends. These have been supported by a 12% CAGR in FFO over the past ten years, allowing it to also grow dividends at a 6% CAGR.

Not only is the FFO forecast positive, but the company aims to grow distributions every year between 5% and 9% as well. This suggests it may continue to be a rewarding stock for dividend investors. The trailing twelve month dividend yield (TTM) of 5.6% is already higher than the utilities sector average of 3.6%. Also, as expected, the forward dividend yield is slightly higher at 5.7% compared to the TTM yield.

In addition, the company also has several lists of preferred stocks such as (TSX:BEP.PR.R:CA) (TSX:BEP.PR.G:CA), along with others (see table below) with dividend rates ranging from 3.1-6.5%, as well as one linked to the Canadian government bond rate, which reaches a rate of over 7% .

#4. Favorable market multiples

With FFO growth forecast, the forward Price-to-FFO ratio (P/FFO) naturally improves significantly over time. From 13.5 times for 2024, it drops to 9.3 times by 2028.

However, the company posting net losses is not directly comparable to similar stocks. Instead of P/E, EV/EBITDA is considered here. BEP looks overpriced from this perspective, with a forward EV/EBITDA of 25.2x, compared to Clearway Energy ( CWEN ) at 12.3x and Atlantica Sustainable Infrastructure ( AY ) at 9.5x.

Investment Takeaways

In the short to medium term

Comparative EV/EBITDA levels do not bode well for BEP in the short to medium term, implying that the stock may continue to decline. That may change, should its FFO grow faster than now projected. But based on the available data, there’s no reason to believe that.

It should be noted, however, that a higher EV/EBITDA does not reflect the fact that BEP is heavily indebted. The company’s most recent net debt/asset ratio is actually at a manageable ~39%. At the same time, its net losses make it less attractive and add to the reasons why the stock may continue to soften for now.

Long term advice

However, in the long term its prospects look quite good. The company operates in the fast-growing green sector and as an outgrowth of this green funding is expected to grow multi-fold in the coming decades. Past revenue and FFO have seen growth over time, and projections for future growth are also positive.

The stock’s P/FFO will improve incrementally and over time. This also bodes well for its dividends. At current price levels, its dividend yield also looks attractive and the dividend is expected to continue to grow with FFO growth, and as per the company’s policy, it should continue to be a good dividend stock. Based on this, for the long term BEP is a Buy.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.