The renewable energy leader, whose investments in wind and solar assets began paying off in 2018, is trading at a deep discount.
For a company with a stated goal to grow its distribution 5% to 9% per year and deliver long-term total returns (the stock performance plus distribution payments) averaging 12% to 15% per year, things didn’t quite go according to plan for Brookfield Renewable Partners last year.
Shares of the renewable energy leader fell 25.8% in 2018 — the worst annual performance in the last decade — and were down by double digits for much of the year. The stock posted a total return of negative 20.9% when distributions were included. That put shares neck-and-neck with the total return of the S&P 500 in the last three years, an unusual position for a stock with a solid track record of comfortably outperforming the index.
Does last year’s sour performance suggest investors should be cautious in 2019? Or is Brookfield Renewable Partners a strong buy?
By the numbers
Brookfield Renewable Partners owns and manages renewable energy power assets in North America, Europe, and South America. It generates revenue and earnings by selling the electricity generated from its portfolio of hydroelectric dams, wind farms, and solar arrays to customers. Depending on market forces, it may sell assets in one location and reinvest the proceeds in a new geography capable of supporting higher rates of return and maximizing shareholder value. Rinse, repeat. It’s a pretty straightforward business.
The company turned in a solid year of operations through the first nine months of 2018. There was only one blemish: relatively weak hydroelectric dam output. Heavy rainfall in North America and Columbia made 2017 a banner year for hydroelectricity, which made year-over-year comparisons appear weak. In reality, U.S. hydroelectric dam output in the rolling-12-month period through October 2018 was the second-highest in the last decade — second only to 2017. In other words, the financial comparisons could have been much worse.
Nonetheless, lower year-over-year rainfall totals explain why the year-over-year comparison deteriorated in the first nine months of 2018. For its hydropower segment, Brookfield Renewable Partners reported an 8.2% drop in electricity output and an 8.5% drop in funds from operations(FFO). While hydro comprises nearly 80% of its portfolio, the business more than made up for that blemish with impressive growth in wind and solar assets. In the first nine months of 2018, total FFO increased 7.3% compared to the year-ago period. That’s great news considering the business is gradually transitioning its portfolio to wind and solar for the long haul.
A head above its peers
Despite a down year, it’s important to note that Brookfield Renewable Partners leaned on its hydropower assets for 73% of its total segment FFO in the first nine months of 2018. It may not be as exciting as wind or solar, but hydropower is a reliable energy source to anchor any renewable asset portfolio, and one that significantly de-risks the build-out of wind and solar assets.
That risk-mitigation advantage provided by a healthy hydropower portfolio is demonstrated by comparing the business and stock to its closest peers. Brookfield Renewable Partners is easily the largest company in the list below, ranked by market cap, which allows it to generate the most adjusted EBITDA. It’s tied for the lowest enterprise-value-to-EBITDA ratio in the list alongside NextEra Energy Partners, which also de-risks its wind and solar portfolio build-out, only with natural gas pipelines. TerraForm Power and Pattern Energy Group lean much more heavily on wind and solar assets without much diversification. Brookfield Renewable Partners stock also boasts the second-highest distribution yield of the group.