This year has been the best of times and the worst of times for Brookfield Renewable (BEP 1.80%)(BEPC +0.00%). On the one hand, the company is having a stellar year. It has secured several needle-moving acquisitions. Those deals have it on track to grow its funds from operations (FFO) by more than 10% again this year.
But despite that success, shares currently sit nearly 30% below their 52-week high. That has pushed the renewable energy company's dividend yield up to around 5.5%. It has a magnificent record of increasing its dividend, growing it by at least 5% annually for the last dozen years.
Brookfield believes this sell-off makes its shares too good to pass up. Here's why it thinks that and what it's doing about it.
NYSE: BEP
Key Data Points
It's positioned to capitalize on the current environment
CEO Connor Teskey wrote about the performance of the company's share price in his third-quarter letter to investors:
The renewables sector traded down in the public markets on the back of higher interest rates and a perceived tightening of industry margins. Even though we are well positioned to benefit in this environment, and insulated from the challenges that are seemingly impacting others in our sector, we have not been immune to the lower market prices. And while we are never pleased when our share price is down, we are long-term focused investors and we believe the outlook for our business is better than ever.
He then detailed several reasons the company is so optimistic. The biggest one is that it's seeing even better opportunities to deploy capital in a market where it's getting tight.
Teskey said that it's seeing attractive opportunities to acquire high-quality businesses with strong development pipelines that lack the access to capital or the scale to build out their projects. Scale and access to capital are two of Brookfield's strong suits.
Growth powered by M&A
Brookfield has already been taking advantage of opportunities in mergers and acquisitions (M&A). It recently closed its deal to buy out its partner's 50% interest in solar power company X-Elio and Duke Energy's commercial renewable energy business.
Meanwhile, it's working to close deals for Westinghouse and Origin Energy. And it recently agreed to buy Banks Renewable and is partnering with Axis Energy to develop renewable energy projects over the next three years.
In total, the company expects to invest $1.5 billion of its capital in M&A. It anticipates these deals will add $200 million in incremental FFO annually. That's meaningful for a company that has generated $840 million in FFO through the first nine months of this year.
Brookfield believes that M&A alone could power over 9% annual growth in FFO per share through 2028. That's noteworthy for a company that already has robust organic growth drivers.
Inflation-powered rate increases, margin expansion, and development projects should fuel 7% to 12% annual growth in FFO per share over the next five years. These drivers will give it plenty of fuel to continue increasing its dividend, which it sees rising by 5% to 9% annually.
Taking advantage of the sell-off
Brookfield is working hard to capitalize on additional M&A opportunities in the current environment because it can earn high returns on those investments. But acquisitions are only one of the many attractive uses of its investment capacity these days. Share repurchases are another.
Teskey wrote in the investor letter: "In light of public market conditions and our strong conviction in the intrinsic value of our business and growth trajectory, we have also started to allocate capital to repurchase shares. Starting this quarter, we repurchased almost 1.5 million units under our normal course issuer bid."
He said that the company would continue to allocate capital where it can get the best risk-adjusted returns. That could be additional M&A, development projects, or share repurchases as it aims to create meaningful value for its investors over the long term.
A compelling investment
Brookfield Renewable has grown its FFO per share at a double-digit annual pace for the last decade, and it expects to continue growing it by more than 10% annually over the next five years, driven in part by its robust M&A opportunities. That should give it plenty of ability to continue increasing its high-yielding dividend.
Despite that strong growth outlook, Brookfield's shares are down sharply this year. The company believes its sell-off is a great buyback opportunity, and it's hard to argue with that. The stock could easily produce double-digit total annual returns from here, making it look like a great investment opportunity.
