As much of the world is going through a secular shift from fossil fuels to renewable energy sources to help slow climate change, many renewable energy stocks have promising growth prospects ahead.
Let's look at the prospects of three dividend stocks of this category, namely Brookfield Renewable Partners (BEP) , Clearway Energy (CWEN) and Aris Water Solutions (ARIS) .
Brookfield Renewable Partners
Brookfield Renewable Partners operates one of the world's largest portfolios of publicly traded renewable power assets. Its portfolio consists of about 23,000 megawatts of capacity in North America, South America, Europe and Asia.
Brookfield Renewable Partners is a great candidate for the investors who seek exposure to the secular growth of clean energy sources. The company has an aggressive growth strategy and enjoys significant competitive advantages, namely a global operating presence, a long and successful track record of operating clean energy assets and a competent management team.
It is also important to note that hydroelectric energy generates about 70% of the total funds from operations of the company. Brookfield Renewable Partners has one of the largest hydroelectric businesses in the world, which has doubled in size in the last five years. Hydroelectric assets benefit from long useful lives (often over 100 years) and extremely low operating and capital costs.
Brookfield Renewable Partners has a project pipeline of approximately 62,000 megawatts. As this capacity is nearly triple the current installed capacity of the company, it is obvious that the renewable energy giant has exciting growth potential ahead.
Until a few years ago, renewable energy could not compete with energy generated by fossil fuels because of the much higher production cost of the former. However, this has changed in recent years thanks to major technological advances, which have greatly reduced the cost of solar and wind energy.
Even better for Brookfield Renewable Partners, the transition from fossil fuels to clean energy sources has accelerated this year as the West responded to Russia's invasion of Ukraine. Russia supplies about one-third of natural gas consumed in Europe and 10% of global oil output. Due to the sanctions imposed by Europe and the U.S. on Russia, the global oil and gas markets have tightened to the extreme this year and thus the prices of oil and gas have rallied to multi-year highs. Consequently, most countries are doing their best to shift from fossil fuels to renewable energy sources, in an effort to reduce their budget deficits. A record number of renewable energy projects is under development right now, primarily due to the Ukrainian crisis.
The only caveat is the somewhat leveraged balance sheet of Brookfield Renewable Partners, which has resulted from the aggressive growth strategy of the company. Interest expense currently consumes 74% of operating income while net debt stands at $33.7 billion, which is nearly 2.5 times the market capitalization of the stock. However, the company has no material debt maturities until 2027 and has promising growth potential. As a result, it is likely to be able to service its debt without any problem. This helps explain its investment grade credit rating of BBB+.
Brookfield Renewable Partners is currently offering a 4.3% dividend yield, with a payout ratio of 78%. The payout ratio is elevated but the MLP is likely to be able to defend its dividend for the foreseeable future thanks to its reliable growth trajectory.
Clearway Energy is a large electric utility, which owns and operates contracted energy generation across three segments: conventional generation, renewables and thermal. The company owns assets that generate more than 8,000 megawatts. Clearway is a large renewable energy player, with more than 5,500 net MW of installed wind and solar capacity. Approximately 2,500 net megawatts of the company's energy comes from natural gas generation facilities.
Thanks to its essential nature, Clearway has proved resilient throughout the coronavirus crisis, as people do not reduce their electricity consumption even under the most adverse economic periods. In 2020, while many companies came under great pressure, Clearway posted just a 3% decrease in its cash flow per share and raised its dividend by 31%. The utility is likely to prove defensive again if the aggressive interest rate hikes implemented by the Fed cause a recession.
Clearway has grown its earnings per share by 5.0% per year on average over the last six years. This is in line with the mid-digit average growth rate that is typical in the utility sector. However, the company has a somewhat more volatile performance record than a typical utility.
Clearway has ample room for future growth, as it has a development pipeline of more than 26 MW. Thanks to the expected approval of rate increases by regulatory authorities and acquisitions of existing renewable energy projects, the company is likely to continue growing its cash flow per share at a mid-single digit rate in the upcoming years.
Clearway is currently offering a 4.2% dividend yield, with a payout ratio of 49%. Interest expense currently consumes 81% of operating income but management has stated that it intends to deleverage the balance sheet and thus reduce interest expense. Given also the fairly reliable cash flows that the utility enjoys thanks to the essential nature of its business, the dividend of Clearway appears safe for the foreseeable future.
Aris Water Solutions
Aris Water Solutions is an environmental infrastructure and services company, which provides water handling and recycling solutions. Its produced water handling business gathers, transports and handles produced water generated from oil and natural gas production. Aris Water Solutions was founded in 2015 and thus it has a short history record.
Aris Water Solutions benefits from a strong secular trend, namely the increasing efforts of most companies to improve the sustainability of their business and hence their ESG scores. The infrastructure of the company serves major oil and gas producers in the Permian Basin, helping them to achieve their sustainability goals.
The strong secular tailwind is clearly reflected in the water volumes processed by the company. In the most recent quarter, Aris Water Solutions grew its total water volumes by 47% over the prior year's quarter while it more than doubled its recycled water volumes. As a result, it grew its revenue 53% and its adjusted earnings before interest, taxes, depreciation, and amortization 28%. It also announced strategic agreements with Chevron (CVX) and ConocoPhillips (COP) . Notably, Aris Water Solutions has grown its water volumes for six consecutive quarters and has not incurred a decrease in its EBITDA throughout this period.
Moreover, Aris Water Solutions has a much stronger balance sheet than Brookfield Renewable Partners and Clearway. Its interest expense consumes only 44% of its operating income while its leverage ratio (net debt to EBITDA) stands at only 2.4. As there are no material debt maturities until 2026, the company can easily maintain its 1.9% dividend. Overall, Aris Water Solutions has a much stronger balance sheet than Brookfield Renewable Partners and Clearway but it offers a much lower dividend yield than the other two companies and has a short historical record, which somewhat increases the inherent risk of the stock.
Because of their aggressive growth strategies, Brookfield Renewable Partners and Clearway carry significant amounts of debt and hence their interest expense takes its toll on their earnings. Nevertheless, thanks to their growth potential and the essential nature of their business, these companies are not likely to have any problem servicing their debt.