BAMKF - Brookfield Renewable: Solid 2022 Results And 5.5% Dividend Growth

Summary

• Brookfield Renewable delivered strong FFO per share growth in 2022.
• The company has reached an incredible 110 GW in development pipeline assets and has 19 GW in advanced stage and construction-ready.
• We find the current valuation reasonable, especially considering the long growth runway, but we would not call it a bargain.

Brookfield Renewable ( BEP ) ( BEPC ) investors woke up to a nice dividend raise of 5.5% on what was already an attractive dividend yield. This is the 12th consecutive year of at least 5% annual distribution growth since 2011, when Brookfield Renewable was publicly listed. The company also reported solid results for the fourth quarter and fiscal year 2022, and continues growing at an impressive pace. Last quarter the company reported 23.6 GW of operating capacity and 102 GW of development assets. This quarter, this has increased to 25.4 GW of operating capacity, and 110 GW of development assets. Brookfield Renewable is clearly working hard to capture the huge opportunity of helping the world transition to clean energy.

Funds from operations (FFO) for the year were more than $1.0 billion, or $1.56 per unit, an 8% increase over the same period last year. In 2022 the company commissioned ~3.5 GW of new projects that are expected to contribute $45 million of FFO annually on a run-rate basis. Perhaps most impressive of all is that in just one year, the company's global renewable power development pipeline has nearly doubled to almost 110 GW today. This includes 19 GW which are in the advanced stage and construction-ready. This under-construction and advanced-stage pipeline is expected to contribute approximately $235 million of FFO annually to Brookfield Renewable once commissioned.

Financials

The table below summarizes the key financials for the company for the years 2022 and 2021. One thing to notice is that actual energy generation was below the long-term average. This is why adjusting for below long-term average generation, the business produced normalized FFO of ~$1.18 billion or $1.84 per unit. In other words, the company delivered strong FFO growth despite actual energy generation being below average.

Balance Sheet and Liquidity

The company continues to generate additional liquidity through upfinancings and capital recycling activities, and retains a very solid balance sheet. Brookfield Renewable reported ending the quarter with approximately $3.7 billion of available liquidity, over 90% of borrowings being project-level non-recourse debt with an average remaining term of 12 years, no material near-term maturities in the next five years, and only 3% exposure to floating rate debt. The average interest rate the company pays on its debt is 5.4%.

One thing that is important for investors to take into account is that Brookfield Renewable does carry significant debt, even if most of it is non-recourse and at the project level. The company's debt to total capitalization is ~43%.

Distribution Payout Ratio

The FFO payout ratio ended the year above the 70% target, but the company is saying that it plans to lower the payout ratio patiently over the medium term. What this probably means for investors is that distribution increases will likely be somewhat lower compared to FFO growth for the next few years until the company reaches its payout target.

Valuation

Based on the increased dividend, BEP units have a forward dividend yield of ~4.6% and BEPC shares of ~4.2%, since they're trading at a roughly 10% premium. The P/FFO ratio is ~18.5x for BEP and ~20.5x for BEPC. These are not exactly cheap multiples, but given the long growth runway, we believe they're quite reasonable. One way to think about the potential return for long-term investors is that if valuation multiples remain constant, and growth remains steady, the total return should approximate the dividend yield plus the FFO per share growth. Using the most recent numbers, this would be roughly 12%. As such, we're maintaining a "Buy" rating, as we believe shares to be reasonably valued, even if they're not currently a bargain.

Risks

The company has the typical risks associated with renewable energy producers, including international operations, exposure to currency fluctuations, and variability in its energy production due to weather and other factors. Investors also should consider that the company carries a significant amount of debt, even if most of it is at the project level. That said, we believe Brookfield Renewable is one of the best-managed renewable energy companies. Risks are also mitigated by the support from its parent company Brookfield Corporation ( BN ), which has access to significant liquidity.

Conclusion

We were impressed by the solid growth delivered by Brookfield Renewable in 2022, with an increase of 8% in FFO per share despite energy generation being below the long-term average. The company has reached an incredible 110 GW in development pipeline assets and has 19 GW in advanced stage and construction-ready. We remain optimistic about the long-term growth runway of the company. The valuation is currently reasonable, and the dividend yield is attractive. Based on the most recent earnings results, we are maintaining our "Buy" rating.

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