Why I just bought more Clearway Energy shares
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Actions of Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A) cooled considerably in 2021. After a scorching race in 2020, the renewable energy stock is now close to 30% of its recent high. This sale has pushed its dividend yield at an attractive level of around 5%. Add that to his long-term growth outlook, and I couldn’t resist the opportunity to add to my position.
An attractive return in the current environment
Clearway Energy has significantly increased its dividend over the past year. The company had to cut the payment by 35.7% in early 2019 when one of its biggest customers, based in California utility Pacific gas and electricity (NYSE: PCG), filed for bankruptcy. However, the bankruptcy process did not change Clearway’s power purchase agreements (PPAs) with the utility. As a result, he was able to reset his payout level last year when PG&E reappeared. In addition to a huge one-time boost, Clearway has provided its investors with several other smaller increases over the past year. Overall, its dividend is now 62% above the 2019 level. At the current share price, this implies a yield of 4.9%, well above the S&P 500 Indexcurrent level of about 1.5%.
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This high yield dividend is built on a solid foundation. Clearway generates very stable cash flow supported by long-term PPAs with an increasingly diverse customer base. The company focused on acquiring renewable energy assets guaranteed by other clients so that a future bankruptcy does not have as much of an impact on its bottom line. On top of that, he has a reasonable dividend payout ratio that is currently in the low end of his target range and great financial flexibility.
A well-fueled growth plan
Clearway Energy has worked hard to improve its financing capabilities over the past year in order to continue to expand its portfolio. This allowed the company to seize several investment opportunities, which gave it more power to increase its dividend. Clearway currently believes it can increase its payments at a rate of 5% to 8% per year, with high-end growth likely in 2021, thanks to its recent success in securing investment opportunities.
The company has secured nearly $ 1 billion in new investments over the past year. This includes the deals he plans to close in 2021 and other long-term opportunities that are expected to start paying dividends in the years to come as they go live. These investments give Clearway a clear line of sight to increase its cash flow per share by 30% from last year’s level, once all of its projects begin to generate liquidity.
At the same time, the company maintains a strategic relationship with the developer of renewable energy projects Clearway Energy Group (CEG). He has the right of first offer to acquire future projects that CEG is developing. This is a huge opportunity, as CEG currently has over 10 gigawatts of renewable energy projects in its development pipeline. As a perspective, Clearway’s current operating portfolio includes 8.2 gigawatts of renewable, conventional and thermal power capacity. While he will not acquire all of these assets, as he will likely induce co-investors to help fund future purchases, he should be able to continue to make a steady stream of new investments through this relationship.
In addition to future rolling agreements with CEG, Clearway Energy will likely continue to make third-party acquisitions. He recently bought an additional 35% stake in a solar project from NRG Energy and bought a wind farm in West Virginia from another seller. Given the huge amount of money needed to develop the renewable energy sector in the years to comeClearway should have ample opportunity to purchase operating assets so developers have the cash flow to continue building.
Powerful dividend growth stock on sale
The recent liquidation of Clearway Energy pushed its dividend yield to 5%. Add that income to its increasingly visible growth prospects, and the renewable energy producer should have the power to produce above-market total returns in the years to come. This combination of income and growth was too appealing to miss, which is why I recently strengthened my position in the company.
This article represents the opinion of the writer, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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