Hannon Armstrong Sustainable Infrastructure Capital (HASI) is a U.S. public company entirely committed to investments in climate change solutions, notes Ben Reynolds, editor of Sure Dividend Top 10 REITs.
The REIT — yielding 5.2% — focuses on providing capital to leading companies in energy efficiency, renewable energy, and other sustainable infrastructure markets.
The asset portfolio of the company is worth approximately $3.9 billion, with 57% in Behind-the-Meter business, which focuses on the installation of solar power, electric storage, and other heat and power systems.
Essentially all the remaining 43% is in The Grid-Connected segment, which involves investments in grid-connected renewable energy projects, such as solar and off/on-shore wind projects.
Hannon Armstrong has more than 350 investments, with an average contract life of 18 years and an investment yield of 7.4%. In the second quarter, the company grew its revenues and its distributable earnings-per-share by 7% and 5%, respectively, over the prior year’s quarter thanks to the growth of its asset portfolio.
Safety & Dividend Risk Analysis
The primary competitive advantage of Hannon Armstrong is its leading market position in a relatively new and booming industry, which benefits from a global push for renewable energy projects. This secular trend should ensure a sustained, excessive backlog and low financing costs, which will result in high returns on investment.
Hannon Armstrong is currently offering an above-average dividend yield of 5.2%. Its payout ratio was unsustainably high until 2019 but it has improved to 72% this year thanks to the high earnings growth of the company.
Thanks to this payout ratio and the exciting growth potential of the company, its dividend should be considered safe. The dividend has grown by only 2.6% per year over the last five years but management expects to raise it at a 5%-8% average annual rate until 2024.
Growth, Value & Expected Total Return Analysis
Hannon Armstrong has exciting growth prospects, as corporations and governments worldwide continue allocating capital toward reaching their Environmental, Social, and Governance (ESG) goals. The company’s pipeline has more than $4 billion of assets.
As this amount exceeds the $2.6 billion market cap of the stock, it is obvious that there is ample room for future growth. Management expects to grow distributable earnings-per- hare by 10%-13% per year and the dividend by 5%-8% per year on average until 2024. We expect distributable earnings-per-share of $2.09 this year and 11.5% growth.
Based on expected earnings-per-share of $2.09 in 2022, Hannon Armstrong trades for a price-to-earnings ratio (P/E) of 13.9. Our fair value estimate for the stock is a P/E of 18.
An expanding P/E multiple could boost shareholder returns by 5.3% per year over the next five years. Adding in the 11.5% growth of distributable earnings-per-share and the 5.2% dividend yield, we expect total returns of 20.6% per year over the next five years.