Brookfield Renewable Partners Stock Has Already Priced in the Good News

Brookfield Renewable Partners (NYSE:BEP) is an offshore investment vehicle that invests in renewable energy projects around the world. Unfortunately, much of the upside for its projects, including any bump from the “Biden effect,” is already discounted in BEP stock.

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For example, the stock is up over 88% in the past year, including almost 23% in the last 6 months. The market seems to realize this as well, since year-to-date BEP stock has been treading water.

What Analysts Say

Various analysts have commented on this point about the company’s limited upside. In January 2021, Wells Fargo analyst Jonathan Reeder downgraded BEP stock to Underweight, citing its valuation. The stock peaked at over $49 in mid-January and is currently at $42.97.

This is similar to the concerns the analyst had in October. He argued then that the “perceived upside” from President Joe Biden’s victory was already factored into the valuation of BEP stock. The stock kept on rising in mid-January.

In addition, another analyst in Seeking Alpha in March 2021 wrote a similar thesis. They say that BEP stock has gotten caught up in the “green bubble.” The analyst argues that the valuation “leaves longer term holders with poor return prospects.”

Other analysts covering BEP stock do not like it much. TipRanks.com indicates that seven analysts have written about the stock in the last three months. Their average price target is just $45.65, where the potential upside is just 6.26% or so.

The BEPC Spin-Off

Of course, not everyone sees things this way. For example, Barron’s magazine recently wrote about a fund that invests in BEP stock as a green “yieldco.” BEP stock has a 2.92% dividend yield, which is not that high a yield right now. However, that is after BEP made a spin-off to shareholders of one of its largest holdings.

As Barron’s explains it, the company’s investment in one particle renewable project, TerraForm Power (NYSE:TERP), became too large a percentage of the BEP portfolio. Brookfield decided to issue it as a special dividend last year called Brookfield Renewable Corporation (NYSE:BEPC).

As a result, Brookfield Renewable Partners cut its quarterly dividend from 36 cents per share to 30 cents. This has had the effect of lowering the stock’s dividend yield to about 2.86% (i.e., $1.22 ongoing rate divided by $42.69).

Distribution Issues

If you owned BEP stock before the spin-off now you own two stocks, including BEPC stock, which also pays a dividend (1.98% dividend yield). However, as a single play, BEP stock has a lower dividend than the two combined, and as such, it is not a high-yield play.

Therefore, the reason to own this stock relates to your preference, or not, to invest in green renewable projects. At least with BEP stock, or even with BEPC stock, you get to earn a dividend income.

Last year, BEP paid out a distribution of $1.16 per unit, on an adjusted basis, which was less than the $1.32 per unit of Funds from Operations (FFO). This is based on page 94 of the recent 10-K filing. Therefore, the distribution was “covered” in the sense that FFO was higher than the payout.

The REIT industry likes to use FFO, even though that measure does not include all the actual costs of running a fund, includes capex spending, changes in working capital, and interest and tax payments. For example, page F-11 of the 10-K shows that the company actually lost 61 cents in net income per unit for the year. So in that sense, the dividend is not covered.

This is also borne out in the company’s very complicated Statement of Cash Flows on page F-15. For example, cash flow from operating activities (CFFO) was $1.296 billion. But this does not cover the combination of capex spending ($447 million) and all of its distribution to various parties, including BEP stock owners ($628 million) and BEPC stock owners ($769 million). BEP used debt to cover the difference.

What To Do With BEP Stock

As I said, the company will likely keep on paying out the “distribution” (notice it is not a dividend) using borrowings. If that is your financial cup of tea, and you like renewable energy stocks, buy BEP stock to collect the dividend.

But don’t hold your breath about any huge upside in the stock.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/bep-stock-has-little-upside-and-an-average-dividend-yield-as-a-renewable-stock/.

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