Atlantica Sustainable Infrastructure Could Be 2023’s Best Yieldco (NASDAQ:AY)

Atlantica Sustainable Infrastructure (NASDAQ:AY) is one of my largest investments for the fast-growing climate economy. This describes the companies that are building the infrastructure underlying the shift towards a global low-carbon economy. This is an important transition if we are to reduce and ultimately eliminate anthropogenic climate change. Critically, it is a secular growth industry that I think offers investors a near-generational opportunity to be present for a change that’s really only going to happen once.

London, England-based Atlantica last paid out a quarterly per share cash dividend payout of $0.445 for a 6.8% yield. This is essentially double its peer group median yield of 3.43% as the common shares have pulled back markedly by 27.5% over the last 12 months.

This is versus a 10.6% retracement of Clearway Energy (CWEN.A) and a decline of around 29.2% of Brookfield Renewable Partners (BEP). The yield, of course, forms one of the most critical considerations for prospective yieldco investors. Underscoring just how much shares have retraced against the underlying cash available for distribution, Atlantica’s current yield at nearly 7% is relatively elevated compared to its historical average below the 6% mark.

This has raised the specter of a dividend cut. Hence, investors would be justified to ask just how safe the current yield is against the volatile macroeconomic environment characterised by intensely rising interest rates and a likely global recession.

Financials Under Stress But Dividend Looks Safe

Atlantica’s last reported earnings for its fiscal 2022 third quarter were mixed with both bears and bulls seeing a reason to cheer. The company recorded revenue of $303.12 million, a decline of 7.9% from its year-ago quarter and a miss of $24.66 million on consensus estimates. The decline was partly due to unfavourable foreign exchange movements.

Around 46% of CAFD estimated for 2022 to 2026 is expected from North America with Europe, South America, and the rest of the world forming the remaining 54%. This level of international exposure is much higher than its peers, similar to Brookfield Renewable Partners, and has been the core driver of the underperformance of the commons. The strengthening of the US dollar against its peers was one of the great macro stories of 2022 as the Fed hiked rates much more aggressively than other central banks. The current hawkish path is forecasted to end after three further 25 basis point hikes and could mean exchange rates being significantly less volatile this year.

A Balance Sheet Getting Stronger

Yieldcos are highly leveraged and incredibly reliant on the capital markets to finance their investments. This has made the current rising rate environment antithetical to the type of value creation that was immediately possible in the era when inflation was low single digits and interest rates were near zero. However, CAFD at $61.7 million was an increase of 5.26% from $58.58 million in the year-ago quarter. This was as electricity produced by renewable assets reached 4,155 gigawatt-hours in the first nine months of 2022, an increase of 20% over the comparable year-ago period. The company’s 2.12 GW of renewable assets, mostly made up of solar photovoltaic, drove the bulk of its CAFD growth and was an increase from 2.02 GW in the year-ago comp. Atlantica also owns 1,229 miles of electricity transmission lines, 398 MW of natural gas and heat, and 17.5 Mft3 per day of water capacity.

Hence, with 115.6 million shares outstanding as of the end of its third quarter, CAFD per share stood at $0.5334, which was more than enough to cover its last declared dividend payout.

The increased cost of new leverage could weigh down on new investments to spark a CAFD decline and put the dividend at risk, but the current payout looks safe. Atlantica is also executing its long-term plan to reduce its debts by around $2 billion from 2021 to the end of 2026. This is through a self-amortizing project debt structure that sees its repayments consist of both principal and interest.

This forms a hedge against the rising rate environment and comes with a $546 million near-term liquidity position mostly composed of a $440 million revolving credit facility and $105.8 million in cash. Atlantica’s US operations will also benefit from the Inflation Reduction Act which provides a production tax credit for utility-scale solar and onshore wind energy production.

The IRA will further boost utility-scale storage through a standalone storage investment tax credit. Atlantica plans to make its first investment in a standalone battery system on the back of the IRA and the 100 MWh capacity battery is expected to start operating in 2024.

The US is on the cusp of a solar decade with US solar deployment set to increase by around 62 GW over pre-IRA projections through 2027. Atlantica intends to ramp up its solar roadmap to ride this wave. I am bullish on the underlying health of the dividends and the prospects of a recovery of the commons in 2023.