Use price weakness to buy stocks that pay a rising stream of income over time. Here’s a utility income trust that’s an independent renewable power generating company that pays you a growing income.
With investors now focused on the prospects for higher interest rates, high-paying dividend stocks, such as those in the telecommunications and utility sectors, have lagged the overall market lately. But we still believe these securities have a place in an income investor’s portfolio. After all, utility and infrastructure companies have real assets that have the potential to deliver you a rising stream of income over time. And if their share prices do weaken in the near term, that gives you an opportunity to buy them when they offer more attractive yields.
Brookfield Renewable Partners L.P. (TSX—BEP.UN) is a case in point. Brookfield operates one of the largest publicly-traded, pure-play renewable power generating platforms. Its portfolio consists of more than 250 hydroelectric and wind facilities in North America, Latin America and Europe and totals more than 10,000 megawatts of installed capacity. More than 85 per cent of its portfolio is comprised of hydroelectric power.
Brookfield’s financial performance for the first three quarters of 2016 was mixed. For the nine months ended Sept. 30, 2016, its funds from operations were US$365 million, or $1.28 a unit, compared to $379 million, or $1.37 a unit, in the same period of 2015.
Top line growth, however, was strong. Revenues rose 52.2 per cent to $1.9 billion, thanks to growth in the portfolio and relatively stronger generation results. But generation was below the long-term average.
Currency hedging didn’t keep FFO whole
The appreciation of the U.S. dollar affected operating and borrowing costs, and after taking into account the effect of Brookfield’s foreign-currency hedging operations, funds from operations were adversely impacted by $31 million.
Also, direct operating costs increased 90.2 per cent, outpacing revenue growth. Most of this increase was due to growth in the portfolio.
In 2016, Brookfield and its partners acquired more than 3,000 megawatts of hydroelectric assets, using what it says is its contrarian, value-based approach. And it continues to identify long-term growth opportunities in new markets and technologies that complement its existing assets and operating expertise.
Management thinks all this bodes well for Brookfield’s prospects and its ability to increase its cash flow and distributions. Over time, it expects to deliver 12 to 15 per cent annualized total returns to shareholders. This includes a targeted five to nine per cent average annual increase in the distribution.
Brookfield trades around a high, but still reasonable 15.1 times its likely 2017 funds from operations of C$2.54 a unit. Its current annual dividend of US$1.78 a unit currently yields 6.2 per cent.
Brookfield Renewable Partners is a buy for growing income and some share price growth.
This is an edited version of an article that was originally published for subscribers in the February 3, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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