John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
I like to do good for the planet when possible. If I can do good for my portfolio at the same time, I consider that a win-win.
Which brings us to today's topic: Brookfield Renewable Partners LP (BEP.UN).
One of the world's largest publicly traded renewable power producers, Brookfield Renewable owns more than 250 hydro and wind assets in North America, South America and Europe that generate enough electricity to power four million homes.
Thanks to its growing asset base, the partnership – controlled by Brookfield Asset Management Inc. – has also been generating some electrifying returns for investors. For the five years ended May 30, the units posted a total annualized return – assuming all distributions had been reinvested – of 16.6 per cent, far outpacing the S&P/TSX composite's total annualized return of about 3.4 per cent over the same period.
For income investors, Brookfield Renewable's 6.1-per-cent yield and steadily growing distribution offer an enticing combination. In February, the partnership boosted its distribution by 7.2 per cent, to 44.5 cents (U.S.) a quarter, and reiterated its objective to continue raising its payment at a rate of 5 per cent to 9 per cent annually.
I expect that Brookfield Renewable will make good on that promise, which is why – barring a dramatic change in the outlook for the business – I intend to be a long-term holder of the units. (I'm also a shareholder of sister company Brookfield Infrastructure Partners LP, which I discussed last week)
Analysts are also confident that Brookfield Renewable will deliver.
"We like the high-quality, diversified asset portfolio and believe BEP.UN offers investors stable, long-term, growing cash flows," analyst Bill Cabel of Desjardins Securities Inc. said in a note. "The company has perhaps the strongest access to capital in our coverage universe and the proven ability to deliver, integrate and operate accretive acquisitions."
Brookfield Renewable's two-pronged growth strategy includes developing new projects and making opportunistic acquisitions, often when assets are out of favour and trading at attractive valuations. For example, since 2011 it has invested more than $3-billion into hydro assets in the U.S. Northeast at a time of historically low power prices.
These assets will "generate strong returns, even if prices remain where they are today, and exceptional returns if prices modestly improve, which we believe will occur given supply-side pressure on coal plants … and growing carbon-reduction initiatives," chief executive officer Sachin Shah said during the first-quarter conference call on May 4.
Another example is Brazil, where Brookfield Renewable has been acquiring high-quality hydro, wind and biomass assets from owners who are being squeezed by the deep recession in that country. "This is creating an opportunity for us to potentially acquire assets with contracted cash flows at over 20-per-cent returns," Mr. Shah said.
Further building its presence in South America, Brookfield Renewable and its partners recently acquired control of Isagen SA, Colombia's third-largest power-generation company. Following a second mandatory tender offer to remaining shareholders this summer, the consortium expects to control nearly 100 per cent of formerly state-owned Isagen, with Brookfield Renewable holding a 25-per-cent stake.
Renewable power is a relatively stable business but, because of Mother Nature's unpredictable influence, it's certainly not risk-free. A severe two-year drought in Brazil, for example, has hurt Brookfield Renewable's hydro-generating results in the country. The recent rainy season has brought some relief, but hydro generation in Brazil during the first quarter was still about 14 per cent below the long-term average.
Similarly, wind generation in North America was well below the long-term average during the quarter, although strong water inflows led to higher-than-average hydro generation in both Canada and the United States. With reservoirs in North America well above levels typical for this time of year, generating results should benefit in coming quarters as well. In addition to the weather, other risks include currency volatility and the potential for higher interest rates, which could exert a drag on dividend stocks in general. It's impossible to control these and other risks, which is why investors have to be prepared to live with short-term volatility in the unit price. But given Brookfield Renewable's plans to expand its already well-diversified asset base, over the long run investors stand to benefit from rising distributions and – ultimately – a higher unit price.
Remember to do your own due diligence before investing in any security. Also keep in mind that, as a Bermuda-based limited partnership, Brookfield Renewable's distributions may include a mix of Canadian eligible dividends, interest from Canadian sources, foreign dividend and interest income, and return of capital. To minimize the tax headaches, I hold the units in a registered account.
Disclosure: The author personally owns shares of BEP.UN.