The renewable energy market has massive growth potential in the coming decades. According to one estimate, the industry needs to invest a jaw-dropping $10 trillion to move to a carbon-free world. That enormous market potential led several companies to establish renewable-focused investment arms to take advantage of this opportunity. Leading asset manager Brookfield Asset Management (NYSE: BAM), for example, formed Brookfield Renewable Partners, while top-tier utility NextEra Energy (NYSE: NEE) created NextEra Energy Partners.
Both of those entities have a similar aim, which is to build and buy clean energy assets supported by long-term, fixed-price contracts and use the associated cash flow to pay an above-average dividend. That strategy makes them attractive options for income-seeking investors. Since most investors will only want to own one of these renewable income vehicles, here's a closer look at which one is the better buy.
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Comparing their financial profiles
The first place investors should start when analyzing two opportunities is their finances. Here's how these two renewable energy companies stack up against each other:
% of Cash Flow Fee-Based or Regulated
Dividend Payout Ratio
Brookfield Renewable Partners (NYSE: BEP)
Less than 90% of cash flow
NextEra Energy Partners (NYSE: NEP)
4 to 5
Roughly 80% of cash flow
Data sources: Brookfield Renewable Partners and NextEra Energy Partners. EBITDA = earnings before interest, taxes, depreciation, and amortization.
As the table shows, the pair have very different financial profiles. Brookfield Renewable Partners has a higher dividend yield due in large part to paying out a greater percentage of its cash flow. (Though it is worth noting that the company's long-term target is to get its payout ratio below 70%.) Meanwhile, Brookfield Renewable boasts a much stronger credit profile since it has the highest credit rating in the sector, which it backs with a conservative leverage ratio. NextEra Energy Partners, on the other hand, has junk-rated credit because of its higher leverage ratio. That makes it much more expensive for the company to borrow money to fund acquisitions and expansion projects.
Contrasting their growth profiles
Both Brookfield Renewable and NextEra Energy Partners expect to grow their cash flow at a healthy clip in the coming years. Brookfield Renewable currently anticipates that its cash flow per share will expand at a 6% to 11% annual rate over the next five years, which should support 5% to 9% yearly increases in its distribution. Roughly half of that growth will come from the improving profitability of its existing portfolio as the company reduces costs, signs higher-rate contracts as the current below-market ones expire, and benefits from inflation escalators on its other agreements.
The other growth driver is the organic expansion projects Brookfield has under development, which currently include a rooftop solar joint venture in China, a new wind facility in Ireland, a hydroelectric plant in Brazil, and a pumped storage facility expansion in North America. The company can fully fund those projects with retained cash flow after paying its high-yield dividend. As such, Brookfield isn't relying on acquisitions to support growth. However, it has the liquidity to invest about $700 million per year on deals that would power accelerated earnings growth. In recent years, the company has partnered with parent Brookfield Asset Management to invest in renewable power generator TerraForm Power and Canadian utility TransAlta.
NextEra Partners, meanwhile, believes it can grow its cash flow at a fast enough clip to support 12% to 15% annual dividend increases through at least 2024. The main catalyst driving that plan is drop-down acquisitions from its parent NextEra Energy. Earlier this year, for example, NextEra Energy Partners bought $1.02 billion of wind and solar assets from its parent, which is a large enough deal to support its dividend growth plan through at least the end of this year. One of the unique aspects of this deal is that the company secured the financing from a private equity fund, which was the second time it used this type of funding for a transaction. NextEra Partners' reliance on outside funding to power its growth strategy is a concern because if its access to financing dries up, it could cause the company to tap the brakes on its dividend growth plan.
Verdict: Brookfield Renewable Partners is the lower-risk buy
Brookfield Renewable and NextEra Energy Partners offer investors the opportunity to generate a growing income stream from the renewable energy market. While NextEra Energy Partners expects to grow its dividend at a faster rate, the company needs to secure outside financing to support that plan, which makes it a higher-risk option given its weaker credit profile. That's why Brookfield Renewable is the better buy, because it offers investors a higher yield along with a lower-risk growth profile. As such, there's a much higher probability that it can generate market-beating total returns in the coming years since it's not relying on any outside forces to power its growth.
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Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Renewable Partners L.P., NextEra Energy, and TERP. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.