One potential aspect of the new tax law working its way through the US Congress is that renewable energy companies will lose some preferential tax treatment. This has caused some worries for investors owning renewable energy stocks. The good news is that renewables are at a point that the companies can compete with traditional energy sources. The bad news is they may no longer have an extra edge of tax credits. Going forward investors need to evaluate renewable energy companies just as they would a fossil fuels energy provider.
With this new way of looking at renewables, which is the old way of evaluating any dividend paying stock, here are two. One may be a danger in your portfolio and the other should be an above average performer.
Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) is a favorite with investors who like an income stock with a clean energy focus. The company owns assets or provides services in three areas of clean energy as shown in this graphic:
The efficiency sector is the one that puts HASI’s cash flow at risk. With this business the company makes loans that are used to increase the energy efficiency of buildings. Most of the clients are government agencies, which are financially encouraged to make the efficiency upgrades. This sector makes up 22% of the HASI assets. Any slowdown would hurt growth expectations. This company also has high costs in relation to revenues.
For the 2017 third quarter the company reported investment income and other investment revenue of $33.3 million. Interest and administration expenses totaled $25.3 million, or 76% of revenue. This is not a financially efficient company and any dip in revenue will be magnified at the core earnings level. For the first three quarters those core earnings were $0.96 per share, while the dividends paid were $0.99 per share. This is a company living on the financial edge and not one that deserves a 5.7% yield. The tight finances point to a stock that is much more likely to go down instead of continuing the recent share price gains.
Pattern Energy Group (Nasdaq: PEGI) owns and operates renewable energy facilities which presently consist of wind farms. The company includes solar facilities in future plans. The company currently has a portfolio of 20 renewable energy facilities, including one project it has agreed to acquire, with a total owned interest of 2,736 MW in the United States, Canada and Chile. The company has secured exclusive access to 10 GW of projects and while they may not all get developed there will be enough to sustain an attractive growth trajectory. Pattern Energy acquires an asset after it has been completed and is generating power and revenue.
Purchase prices are set to assure accretive cash flow per share growth. The company has increased the dividend every quarter since its October 2013 IPO. With the tax fears, the PEGI share price is down 18% from its September high and currently yields 7.9%. This is the better clean energy dividend stock.
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