Say what you will about Goldman Sachs (GS ), but the truth is, it knows how to make money for its clients and partners. So when the investment bank goes hard into an idea or theme, it’s best to take notice. And it seems that Goldman’s latest ideas are about making some green by going green.
In this case we are talking about solar and wind energy.
Already, the financial firm plowed some big bucks into renewable energy and hit its target of investing $40 billion into clean energy technologies by 2012. Now, it wants to more than quadruple that figure. Goldman recently announced that by 2025 it will invest more than $150 billion in solar and wind farms, grid infrastructure and green building upgrades.
That’s a lot of coin to be betting on “riskier” renewables and green technology. At least on the surface it is. Looking a bit closer and you can see a common theme in those three primary areas of investment, one that could mean some big income for dividend seekers.
All About Cash Flows
Goldman’s investments in the renewables/green space all has to do with cash flows. They aren’t taking a gamble on a solar panel manufacturer. Instead, the company is focusing on businesses that generate actual cash from their operations. Building a wind farm and then selling the power it generates produces cash. Owning transmission lines and invertors needed to add renewable to the grid, and then renting those out to utilities produces cash flows. Buildings that have certain LEED or green upgrades command much higher rents and you guessed it, produce cash flows.
While investing in the latest algae-based biofuel producer may be sexier, the firms that own/operate the renewable energy facilities are the ones actually producing cash flow. Goldman knows this. Heck, even Warren Buffett, through his MidAmerican Utility, knows it.
And as a dividend investor, you should know it too.
The key to betting on the owners/operators of various renewable energy infrastructure happens to be in a class of stock developed back in 2012 called a YieldCo.
Basically, a standard utility will place various solar facilities, wind farms, and other generation assets into a separate spun-out firm. Various tax and deprecation credits allow the YieldCo to pay virtually no tax and pass much of its cash flows back to investors and sponsoring firms. Owners of YieldCo shares, which include the utility, are treated to some big time dividends.
The YieldCo structure worked great for the first few years of its existence and then the Fed threatened to raise rates. Now, share prices for the various YieldCos have tanked hard. For example, TerraForm Power (TERP ) is down about 50% over the last 52 weeks.
The drop in the sector has also thrown a wrench in the cog of the YieldCo model, at least on the surface. Many of these firms used equity to finance deals to buy more assets from their parent companies. Adding new plants is how the YieldCos kept the dividends growing. With share prices low, utilities have an estimated $26 billion in plants waiting to be dropped down into their respective YieldCos.
Still Plenty of Dividends to Be Had
With the YieldCos currently hated, now might be an interesting time to buy them. For starters, the rise in interest rates continues to be an overblown fear. Most high-yielding sectors do quite fine as the Fed raises, mostly because of the pace of rate increases. The Fed isn’t expected to go from zero to 15% overnight. Most high-yielding sectors actually go on to outperform after an initial “shock” from the first rate increase.
Perhaps most importantly, the YieldCos, for the most part, still generate/produce strong dividends and cash flows. The contracts they operate under are long-term with set pricing metrics. So any plants already tucked into the structure will generate income. It’s just that dividend increases may slow to a trickle or stop.
While dividend growth is key, the drop in shares has pushed yields up for many of these stocks into the juicy range. For example, Brookfield Renewable Energy Partners LP (BEP ) yields over 6%, while NRG Yield (NYLD ) yields 5.75%. That’s already pretty high and provides some wiggle room for investors as they wait for the sector to recover in a few years’ time.
The Bottom Line
Goldman is right when it comes to renewable energy: don’t buy the sexy names and focus on cash flow generation. The way to do that is through the YieldCos. What’s great is that they are hated right now and offer an interesting buy for new investors. Top notch YieldCos like NYLD, BEP and 8Point3 Energy (CAFD) can now be had for peanuts.