It’s my favorite energy store right now
I have many energy actions in my wallet. My favorite is Brookfield Renewable Power (NYSE: BEP)(NYSE: BEPC). She has done a great job creating value for shareholders like me over the years by steadily increasing her cash flow per share and dividend.
But as good an investment as it has been in the past, I think Brookfield could be even better in the future. Here’s why.
A global leader in the renewable energy megatrend
Brookfield built one of the largest renewable energy platforms around the world over the years. The company has grown steadily by acquiring and developing high quality renewable energy assets and generating cash flow.
This strategy has paid large dividends to its investors. Brookfield has developed its operating funds (FFO) per share at an annual rate of over 10% over the past decade. This has helped support 6% annual dividend growth since 2012, pushing the yield to 2.9%. Since inception, Brookfield Renewable has generated an annualized total return of 20%.
This gives the company a solid foundation to continue to create shareholder value as the decarbonization megatrend shifts into high gear in the years to come. Brookfield has expertise in all major categories including hydropower, wind (offshore and onshore), solar (utility scale and distributed generation), energy storage, green hydrogen and energy transition assets. Because of this, he can seize opportunities across the spectrum, allowing him to become the partner of choice for companies and institutions wishing to decarbonize their operations.
A bright future
Brookfield believes it can generate robust FFO per share growth over the next several years as global decarbonization efforts accelerate. The company’s existing assets can support increases of 3% to 6% FFO per share through 2025. Its outlook is based on indexing inflation to existing contracts and its ability to obtain higher rates at expiration of existing agreements.
On top of that, Brookfield has an extensive development pipeline. The company ended the second quarter with 31 gigawatts (GW) in its global development pipeline. To put the size of its order book into perspective, it has spent decades building its current operating portfolio, which has 21 GW of capacity. The company estimates that it can invest $ 250 million to $ 350 million per year in its development pipeline, which represents an annual growth of 3-5% FFO per share. Brookfield can fund these investments with cash retained after paying its distribution and leveraging its leading balance sheet.
Add it up and the company can grow its business organically at 6% to 11% per annum through 2025. This easily supports its plan to increase its high yield dividend at an annual rate of 5% to 9 %.
However, this is only the tip of the iceberg. Brookfield believes it can continue to carry out highly profitable mergers and acquisitions (M&A). It can deploy up to $ 1.5 billion in mergers and acquisitions per year, which could increase its FFO per share by up to 9% per year. It has already invested $ 500 million in 2021 on a series of deals, putting it on track to capture a nice M&A bump this year. The company finances this growth through its capital recycling program of selling low-yielding assets and using cash for higher-yielding opportunities.
In total, Brookfield could generate up to 20% annual growth in FFO per share over the next several years. This would allow the company to raise its dividend near the top of its target range, thereby improving its payout ratio and making it even more financially sound. This combination of growth and income is expected to generate well above average total returns.
One of the best positioned companies in this megatrend
Brookfield Infrastructure is a global leader in one of the greatest megatrends of our lives. She has an excellent track record of creating shareholder value by consistently building one of the highest quality companies in the industry. For this reason, it is in an ideal position to continue to increase value for investors in the years to come.
This high probability of generating attractive total returns is why Brookfield Renewable is my preferred energy stock.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.