For conservative holding Brookfield Renewable (BEP), last year was the best for business yet. Funds from operations per unit increased 7.1 percent, supporting a 5.2 percent dividend increase — which could have been meaningfully higher had management not elected to accelerate investments, states Roger Conrad, editor of Conrad's Utility Investor.
Brookfield added a record 5 gigawatts of renewable energy projects to its backlog during the year, well ahead of the previous year’s 3.5 GW. That boosted its “advanced stage” development platform to 24 GW. And 90 percent of the new contracts are with corporate customers, much tied to data centers seeing accelerating electricity demand from artificial intelligence.
With major rooftop solar players’ futures in doubt, Brookfield’s nascent distributed energy business saw a 30.1 percent jump in earnings. And geographic and source diversification overcame weaker water, wind and solar conditions in certain areas — for example Colombian hydro — that triggered massive earnings volatility when the company was smaller.
Higher interest rates notwithstanding, management continues to have little problem funding expansion. Last year, Brookfield executed on nearly CAD15 billion in non-recourse project-level financing, sold CAD800 million of non-core assets and took advantage an improved bond market in January to offer 30-year notes at a modest interest rate of 5.3 percent.
With actual generation just 92 percent of LTA (long-term average) in 2023, Brookfield could expect solid growth in cash flow just from a return to more normal weather conditions.
But with another CAD10 billion development fund in the making and the company tapped into a robust global AI market including in India, there’s plenty to support the investment target of CAD7 to CAD8 billion over the next five years.
So why hasn’t Brookfield stock been as successful as its business the past couple years? Aside from dividend stocks and renewable energy being out of favor, there’s still skepticism its funding model is sustainable with “higher for longer interest rates.”
That implies a fast return to favor when investor perceptions on interest rates inevitably change. In the meantime, the value proposition of a 6 percent yield growing 5 to 8 percent annually is always compelling. Brookfield is a buy up to $40.
