Clearway Energy: A High-Yield Play On America's Renewable Future

seekingalpha11-04

Clearway Energy presents an attractive way to profit from U.S. renewable energy growth.It's well-capitalized without the need to issue equity through 2027 and has a strong pipeline of projects.CWEN ...

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It’s also time to take stock of what a wild year it’s been thus far for stocks of all sizes, dividend or no dividend. As we head toward the final two months of the year, I remain focused on growing my income in preparation for 2025 and beyond, and that includes building a diversified basket of solid income generators. This brings me to Clearway Energy (NYSE:CWEN), which fits the profile of a stock that I’d like more exposure in my income portfolio, due to its well-managed business and strong growth runway. CWEN currently yields an appealing 6.1% (6.6% for CWEN.A) and currently trades meaningfully below its 52-week high. In this article, I discuss why CWEN and CWEN.A are appealing high yield picks for income and value investors, so let’s get started! Why CWEN? Clearway Energy is one of the largest renewable energy companies in the U.S., with a diversified portfolio of wind, solar, and natural gas facilities. Its long-term aim is to grow its fleet of renewable assets across strategic U.S. markets, and it generates cash flow from long-term contracts. This includes solar contracts with investment grade rated counterparties with ~20 years useful life. Unlike peer Brookfield Renewable Partners (BEP), which derives just under half its cashflows from hydropower, CWEN is more geared toward solar and wind, with conventional gas assets rounding out the balance. CWEN continues to expand its renewable portfolio as it pivots away from conventional energy (natural gas). As shown below, CAFD (cash available for distribution) from Wind is expected to grow from 29% to 39% between 2023 and 2025 and Solar is expected to grow from 38% to 40%, while CAFD from conventional energy is expected to decline by 10 percentage points to 23%. Investor PresentationMeanwhile, CWEN generated renewable energy production that was in line with expectations during Q3 2024. This resulted in adjusted EBITDA of $354 million and CAFD of $146 million, and puts CWEN on track to deliver 7% EPS growth for the full year. It’s also made solid steps toward accretive growth, including its commitment advancing the Pine Forest Solar Plus storage complex. This project will be a complementary addition to CWEN’s existing fleet in the fast-growing ERCOT (Texas) market, with funding expected to happen next year. Moreover, CWEN is expanding its fleet of solar projects in Utah with Phase 1 of the Honeycomb battery hybridization program. This project is expected to yield 10% with a target funding date in 2026. These projects support management’s estimated 7.5% to 12% annual CAFD CAGR between now and 2027, and long-term post-2027 target of 5% to 8% annual CAFD growth. Importantly, CWEN is well positioned with having more than enough capital deployment opportunities to meet its growth investment goals between now and 2027. This is supported by a well-balanced capital structure with no need for equity issuances through 2027. Beyond that, management noted the need for just modest equity issuances to achieve the top-end of its base long-term growth target, as noted during the recent conference call:  While we don't need external equity to achieve the midpoint of our 2027 CAFD per share target, we do plan to eventually fund a portion of long-term retained growth by modest levels of equity issuance, but in a way that is predictable, deliberate, disciplined and focused on accretion. We will always be measured when evaluating the potential issuance of shares and it will always be for investments that increased the amount of CAFD attributable to our investor's respective ownership on a per-share basis. Indeed, even to achieve the top end of our base long-term growth objectives, our goals would call only for modest equity issuances that can be executed by an ATM and targeting issuance of a small percentage of our public float, and without any immediate need for such issuance today.  CWEN continues to target a leverage (net debt to EBITDA) ratio in the 4.0x to 4.5x range for 2025 and beyond and a dividend payout. It also targets a dividend payout ratio in the 80% to 85% range over the next two years, a 70% to 80% payout ratio in 2027, and a low-70% payout ratio post-2027. Importantly for income investors, CWEN grew its dividend again recently by 1.7% to $0.424. CWEN has a track record of raising its dividend every quarter, and the current quarterly dividend rate sits 7% higher than the prior year period. It’s worth noting that dividend growth is expected to “slow” to 6.5% next year, and 5-6.5% thereafter as management seeks to lower the payout ratio to have more retained funds for growth projects. In the near term, this leaves CWEN with $220 million in retained CAFD between now and 2027 to fund growth projects. As shown below, this includes 4.4 GW worth of incremental capacity between now and 2027, which includes 1.1 GW of dropdown assets from Clearway’s sponsor next year and another 3.3 GW of assets from wind, solar, and battery storage thereafter. Investor PresentationCWEN is appealing at the current price of $27.61 with a well-covered dividend yield of 6.1%. Plus, as noted earlier, the dividend is expected to continue its growth trajectory. A more appealing option may be the Class A shares (NYSE:CWEN.A), which are economically equivalent to CWEN. CWEN.A is less liquid than CWEN, so it may be more appealing to retail investors who trade in smaller blocks. CWEN.A currently trades at $25.90, equating to a 6% discount to CWEN, and carries a higher dividend yield of 6.6% (due to its lower price). Using CAFD as a proxy for earnings, CWEN.A currently trades at a P/CAFD ratio of 12.0x, based on management’s guidance for $2.15 CAFD per share in 2024. Estimated P/CAFD for 2027 falls to 10.8x based on a conservative estimate of $2.40 CAFD per share, which sits at the low end of management’s target. Risks to the thesis include market and regulatory risks, as lower-than-expected fossil fuel prices could result in lower demand. Moreover, adverse changes in renewable energy credits and incentives for CWEN’s customers could also lower demand. Moreover, changes in weather patterns from quarter-to-quarter could negatively impact CWEN’s asset productivity, and materially higher interest rates could also negatively impact CWEN’s bottom line. Investor Takeaway  Clearway Energy presents an appealing opportunity for income-focused investors seeking exposure to renewable energy. With a solid pipeline of projects and a well-balanced capital structure, CWEN is poised for long-term growth. With a 6.1%/6.6% dividend yield on CWEN/CWEN.A, expected 7.5-12% CAFD per share CAGR in the near term, and 5-8% CAFD/share CAGR over the long run, CWEN and CWEN.A could produce market beating total returns from here.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480589804"}