Earlier this month I blogged about my plan to help make this world a greener place by supporting renewable energy initiatives. One way to do this profitably is to invest in green companies. On Thursday this past week I purchased 50 shares of Brookfield Renewable Energy, (BEP.UN) for $38.05 CAD each for a total cost of roughly $1,900. It also trades as BEP on the New York Stock Exchange for interested investors in the U.S.
This is my first investment in a pure-play renewable energy company. Brookfield Renewable develops, owns, and operates renewable power generation facilities. It’s one of the largest and most diversified publicly traded green companies in the world. BEP has a diversified portfolio of high quality assets and over 100 years of power generating history. 🙂
The Business of Brookfield Renewable Energy
I’ve always like the idea of investing in B.C. Hydro or Ontario Hydro because the idea of creating electricity through the power of nature itself (water and gravity) and then selling that electricity to make money sounds like a great business model. The profit margin must be very profitable because once a hydro dam is built it doesn’t cost much to maintain it. But there’s no practical way for me to invest in crown corporations and government operated hydro facilities. Luckily, Brookfield Renewable has the solution. 🙂
BEP has over 7,000 MW of installed capacity, predominantly from its large hydroelectric portfolio. This means I can invest in water dams via BEP. 🙂 80% of the company’s assets is hydro projects, the highest quality renewable asset class. The other 20% is split between solar farms and wind farms with a compelling total return profile. In total Brookfield Renewable has $20 billion of assets under management (AUM,) mostly in North America, as the map below shows.
But ultimately what I really want to know is will this company be profitable in the future. First let’s look at its historical returns. Thanks to the experienced management team at the Brookfield Asset Management company (BAM), the parent company of Brookfield Renewable, BEP was able to return to its investors 16% compounded annualized return since inception in 1999. Hey not bad at all! 😀 It outperformed both the Canadian and U.S. stock market indexes.
But past performance doesn’t also reflect future gains so let’s take a look at what management plans to do with the company going forward. BEP’s main objective is to deliver long-term gross returns of 12% to 15% on a portfolio basis. The company says it seeks to keep a distribution growth target of 5% to 9% a year and a payout ratio of 65%. Currently BEP.UN pays a 5.5% dividend. Since it’s in my TFSA I don’t expect to pay too much tax on the distribution. We also know from its website that Brookfield Renewable deals largely with cash flow contracts. This means its customers are obligated to buy electricity from BEP at a predetermined price for a set number of years. The weighted average of these agreements is 18 years. This takes a lot of risk out of current and future revenue fluctuations. 🙂
As with all renewable energy companies BEP faces resource risk. Climate change could alter landscapes, change wind patterns, and dry up rivers and lakes in the future. A financial world of rising interest rates can also be a concern since BEP does use leverage and borrow money to finance its projects.
Given the strong track record of the management team, and the increasing demand for green energy the pros of investing in BEP outweigh the potential risks. With a portfolio of high-quality assets, strong growth opportunities and a significant pipeline of development projects, I believe Brookfield Renewable Energy is positioned to produce attractive long-term total returns with growing cash flows and distributions to shareholders, exactly what I want for my buy-it-and-forget-it retirement portfolio. 😀
In case anyone is interested in further reading about BEP here is its latest investor presentation
[Edit] I bought 29 more shares of BEP.UN for $36 each on July 28th 2015. This is to hold enough units for the DRIP. [/Edit]
Random Useless Fact
This seems to be a great buy. This in a TFSA or RRSP? That is a great yield and this is definitely a safer investment then Just Energy, which I own.
If you own shares in Emera, you have exposed to green energy via solar panels, wind energy and hydroelectric.
I like Emera too, but currently don’t own it. I forgot to mention it but it’s in my TFSA. Ideally this would go into my RRSP but I’ve no more contribution room left lol. I used to have JE.UN. Held it for 3 or 4 years starting from 2009. I might get back into JE again in the future if it can show growth again.
Does this have some weird tax paperwork associated with the dividends since it is a “LP” ?
Haha, yes. It’s an LP which has its projects managed by a separate company with an MP structure, both of which are part of a large complicated network of corporations that all fit under the parent company, Brookfield Asset Management Inc (BAM.A). I think the best way to invest in LPs is to buy them in an RRSP. But in any case Canadians who hold BEP.UN will probably have to pay at least some kind of tax. There shouldn’t be too much paperwork for it though. Either Brookfield or our discount brokerage should send us a tax form that breaks down all the different portions of the unit distributions that we’ve received in the previous year. We can simply fill out our annual income taxes with that information. For more information, BEP.UN explains the tax breakdown on its website. https://www.brookfieldrenewable.com/content/investor_relations/tax_information-30427.html
Nice purchase, F35. Ive been reading up on the Brookfield set of companies and it sure is a confusing corporate structure. I am hoping to figure out a few more details before I put some money to work in this great sector of the economy.
Yes, it’s quite complicated. It appears they are in many other areas of business management as well. Very diversified group of interests. 🙂
Well done. Own some as well and looking to buy more and more and more 🙂
Great one to hold. 🙂
Two questions that cannot be answered from what you wrote so far:
– if it trades on the TSX but is not a Canadian company, does this mean that you don’t pay a dividend tax if it is held in the TFSA?
– the P/E ratio for this company is about 150, which is 6-7 times more than the market average. How can you buy an asset signaled by the P/E ratio to be vastly overvalued?
A P/E ratio is not an effective way to evaluate MLP. Click on the below link and there is a section “What is Distributable Cash Flow (DCF) and why is it a better way to value MLPs than earnings and P/E ratios? ”
Hi Giselda. I’ll address the question about valuation first. For mid to large cap stocks that have a low or negative EPS the P/E ratio can swing widely from year to year and may not give an accurate representation of the overall health of the business, so other measurements of profitability can be used to determine its fair market value. The P/E ratio of BEP.UN is extremely high right now. Since it’s a limited partner (LP) the profit it makes is treated differently than in a regular corporation. From what I understand the cash flow generated by BEP.UN flows through directly to the unit holders like myself so the company doesn’t have a large tax liability. This means we can use other metrics on it such as Price to Cash Flow ratio (which is currently at 6.5x) so it’s not considered too expensive given its risk level and considering other alternatives in the market. 🙂 Using DCF like Investing Pursuits suggested works as well. The P/E ratio is an important measurement to evaluate a company, but it’s only one of many that we can use together to determine the price of a stock. Last year I bought another stock that… Read more »
Shouldnt the taxes from other various countries already be accounted for by the company before the dividends are declared? For e.g., I own BNS in my TFSA account – which has revenues coming in from 55 countries and all the taxes are accounted for – before the dividend is declared and paid out.
The dividend in BEP’s case will be different each quarter because of the exchange rate as they declare in US$ and are paid out in CAD$ depending on forex rates on the date of declaration.
Good point R2R. I’m not sure if the different make up of the distribution income will affect my taxes. It probably shouldn’t, but the LP is headquartered in Bermuda. After I get my first payments from them for the quarter I’ll post an update.
It’s an interesting company that’s for sure. I came across it when you mentioned it a while ago. Definitely need to pay more attention and do some more research myself. I like the idea of investing in renewable energy.
Supporting green energy is the hip thing to do right now. 🙂 The stock is down a bit since I bought it last week. If it continues to drop maybe I’ll buy some more.
Nice post Liquid. I didn’t really know much about BEP but had looked at its parent company BAM recently. I like the 5.5% yield and I think it’s something I might look into further. Thanks for sharing this informative post.
BAM is a great stock to hold as well. Can’t go wrong with either. 🙂
Great post! I have a bit of my portfolio in BEP, they’ve been performing well compared to others in the sector. Always happy to support green energy. Got my first dividend (I think?) from them but my brokerage did some weird crap with it. Who knows?!
Cool beans. We are kind of business partners now because we have both have skin in the same company. 🙂
[…] Brookfield Renewable. – Bought $3,000 between June and July. Liking the long term sustainability strategy. Returned about 2% so far. I’ll take it! […]
I am a Canadian senior who I would like to buy some Brookfield Renewable Energy Partners units for my retirement income portfolio but don’t like the look of its extremely high P/E ratio, compared to all the other companies I hold in this portfolio, which mostly have a P/E under 20. What do I not understand about this company’s P/E? Why is its P/E well over 1000 (!!!!) yet it remains so popular for both private and otherwise conservative institutional investors?
Hi Mary. I think BEP.UN’s P/E ratio is so high because it’s throwing all its profits back into the company to pay for equipment and resources in an attempt to grow top line revenue. Just like other stocks with high P/E ratios such as Amazon, Brookfield Renewable could probably make a decent profit if it wants, but decides it’s better to invest in itself.
[…] also sold all 152 units of Brookfield Renewable Partners (TSE:BEP.UN) I blogged about buying this company back in 2015. It has performed well. I’m up about 150% total return including new units added via DRIPs. […]