As we discussed recently, at High Yield Investor we love to buy infrastructure stocks (IFRA). The sector has a very impressive growth runway driven by several factors, including strong economic growth in developing markets, aging infrastructure in developed economies, and the de-carbonization of the global economy. Renewable energy infrastructure businesses like Clearway Energy (NYSE:CWEN)(NYSE:CWEN.A) benefit from all three of these trends.
We owned CWEN.A previously at High Yield Investor and sold it for a 126% annualized gain. Since then, the stock has traded pretty flat while the underlying earnings power and dividend stream have grown. Furthermore, with its focus on and expertise in renewable energy infrastructure, it continues to have a very promising growth runway for many years to come. In this article, we give the stock a fresh look and discuss at what price we would consider re-adding it to our portfolio.
CWEN Stock’s Substantial Growth Potential
As the United States’ 5th largest renewable energy company, Clearway Energy Group (CWEN’s sponsor) has a substantial growth runway that only got more impressive with French energy powerhouse TotalEnergies (TTE) acquiring a 50% stake in the company last year in an effort to accelerate its own renewables exposure. This should help provide greater access to and potentially a lower cost of capital for the firm alongside the owner of the other half of the company (Global Infrastructure Partners). The bottom line is that CWEN should not lack for deal flow given the bullish macro trends in the industry and its backing from such larger industry players.
This is evidenced by the fact that its 9 GW growth pipeline exceeds its already large 7.7 GW operational portfolio. Given that it is pouring capital into attractive investments that offer ~9.5% CAFD yields and very long power purchase agreements, it is able to grow its CAFD per share at a high single digits CAGR while also enjoying substantial cash flow stability and visibility well into the future. As a result, management is confident that it will be able to deliver dividend per share growth near the upper end of its 5-8% targeted CAGR through 2026 at least.
Wall Street analysts also appear to be buying CWEN’s growth guidance, with the consensus forecasting a 7.6% CAFD per share CAGR and a 7.9% dividend per share CAGR through 2026.
CWEN Stock’s Value Proposition
While its growth guidance remains very attractive and quite achievable, its BB credit rating from S&P is a bit of a cause for concern. However, we are not terribly concerned by the junk credit rating given that – while it is heavily leveraged and its assets are mostly not perpetual in nature – its balance sheet is conservatively structured at the corporate level. The vast majority of its debt is non-recourse to the corporate balance sheet and it has no corporate level debt maturing until 2028. Perhaps best of all in the current environment is that practically all (~99%) of its total debt has fixed interest rates. As a result, we have little concern that the company’s growth investment and dividend per share growth trajectory will be undermined by its balance sheet.
The current forward dividend yield is also attractive at 4.8% based on expected growth this year. When combined with the expected 7-8% annualized dividend per share and CAFD per share CAGRs, the total return profile is clearly in the 12-13% annualized range. That said, however, the valuation multiple appears to be a bit elevated relative to historical norms with the EV/EBITDA at 10.61x currently compared to the five-year average of 9.44x. While it is true that the growth profile has improved over that time span given the passage of the so-called Inflation Reduction Act and its recent backing by TTE, interest rates have also risen substantially over that period of time.
As a result, we think the stock should trade at a 10x-10.2x EV/EBITDA before we would be more comfortable that the total return profile is truly in the double-digits with a comfortable margin of safety, making it a Strong Buy. As a result, we would probably not want to add CWEN.A to our portfolio until it traded in the range of ~$26-$28 per share.
Investor Takeaway
CWEN.A/CWEN is a great renewable energy infrastructure business that owns a well-diversified portfolio of assets, including solar, wind, natural gas, and electricity distribution. It has the backing of two strong entities that own its sponsor and a very attractive growth runway as a result. Furthermore, its balance sheet is prudently structured, even if it is a bit heavily leveraged.
The dividend yield plus expected per share growth rate in the coming years makes it a clear Buy at the moment. However, its EV/EBITDA is a bit elevated and we do not believe there is a large enough margin of safety in the stock price right now to make it a Strong Buy. As a result, we would like to see a 10-15% decline in the stock price from current levels before making it a Strong Buy and adding it to our portfolio. For now, we are finding better value in the sector elsewhere.
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