Yieldcos Are Still Cheap

08/24/2018 5:00 am EST

Focus: UTILITIES

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

I’ve been pounding the table for buying yieldcos all year. Now it appears I have company, suggests Roger Conrad, editor of the industry-leading, sector-specific advisory service Conrad's Utility Investor.

The key is strong business results. Atlantica Yield (AY) shares again pushed into the low $20s. Management declared a two-cent per share increase in the 6.6 percent quarterly dividend. That’s 6.3 percent above the previous quarter and 30.8 percent higher than a year ago.

Atlantica posted a 6.2 percent boost in its first half 2018 revenue, a 12.8 percent lift in EBITDA and 35 percent higher cash available for distribution. That was due mainly to increased efficiency of facilities, particularly the Kaxu solar plant in South Africa.

There’s room for further gains in the second half of 2018, including at the Mojave solar plant in the US. Going forward, the most important growth driver will be how fast 41.5 percent owner Algonquin Power & Utilities (AQN), wants to develop and drop down assets.

Atlantica’s earnings call gave few clues on timing. But the acceleration of dividend growth is a very good sign the best days are ahead for Atlantica, a buy up to $24.

I’m still a big fan of NextEra Energy Partners (NEP), which lifted its quarterly dividend by another 4.2 percent last month (up 15.1 percent last 12 months). Those numbers were also backed by strong operating results. The only problem is valuation after the yieldco’s recent run-up. But Partners remains a strong buy on any dip to 44 or lower.

The best buys in the yieldco space right now are higher yielding Pattern Energy Group (PEGI) and TerraForm Power (TERP). TerraForm’s second quarter results should support management’s targeted 5 to 8 percent dividend growth. Yielding over 7 percent, it’s a buy up to 12.50.

Investors will have to wait a bit longer for a boost at Pattern, as the company deploys its cash to develop major new contracted wind power projects in New Mexico and Japan.

But it pays over 9 percent and concern about the security of contracts in Ontario looks overblown. Pattern is a buy up to 20 for those who don’t already own it.

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