Best stock to invest in
Tom Konrad Ph.D., CFA
Clean Energy Stocks model portfolio have reported first
quarter earnings. There were few surprises, and those were
mostly pleasant ones, allowing the model portfolio to add to its
gains, and pull a little farther ahead of its benchmark.
For the year to the end of May, the model portfolio is up 13.8%, 2%
ahead of its benchmark. The benchmark is an 80/20 blend of the
clean energy income benchmark (the Yieldco ETF YLCO)
and the clean energy growth benchmark (Clean Energy ETF PBW),
with the ratio matching the 80/20 mix of income and growth stocks in
the model portfolio.
The 8 income stocks again led the pack, with an average total return
of 15.2% for the year to date. The Green Global Equity Income
Portfolio (GGEIP), an income and green focused strategy I manage
also did well, up 13.5%. For comparison, the income benchmark
YLCO produced a solid 11.4% return.
The two growth stocks recovered from losses early in the year and
are now up 9.4%, but still behind PBW at 12.9%.
Pattern Energy Group
12/31/16 Price: $18.99. Annual Dividend: $1.63
(8.6%). Expected 2017 dividend: $1.64 to $1.67. Low
Target: $18. High Target: $30.
5/31/17 Price: $22.56. YTD Dividend: $0.408 (2.2%).
Annualized Dividend: $1.655. YTD Total Return: 21.2%
Wind-focused Yieldco Pattern Energy Group advanced in strongly in
April ahead of first quarter earnings. Earnings did not
disappoint, and the Yieldco added to those gains in May.
Guidance for 2017 Cash Flow Available for Distribution (CAFD) is
$140 to $165 million, which would be 5% to 24% increase on 2016
Growth has been slowing for Pattern, mainly because the low share
price following the Yieldco bust at the end of 2015 has prevented
the company from raising much equity capital. I expect that
the share price will need to rise into the high 20s before we see
large equity issuance from Pattern. With lower growth, they
are also lowering their quarterly dividend increases. Since
the IPO in 2014, the average quarterly increase has been 2.7%, but
the company only increased its dividend 2% in the fourth quarter of
2016 and 1.4% this quarter. This lower rate of increases seems
prudent, given that CAFD may only grow 5% this year at the low end.
Less prudent in a time when the company needs to be careful with its
cash is the Yeildco’s consideration of an investment in the early
stage projects of its parent, Pattern Development. In general,
I think it is a good idea for Yieldcos to invest in project
development with some of their resources, and eventually, as they
grow larger, do much of their project development in house.
That said, the time to invest in relatively risky but potentially
high return businesses is when the stock is highly valued.
When money is tight, as it is now for Patten and most other
Yieldcos, it’s best to focus on investments that will increase the
dividend in the short term. The time to invest in Pattern
Development will be after the stock price recovers. Even small
investments in early stage projects like the one being considered
will only delay further stock price recovery.
12/31/16 Price: $12.98. Annual Dividend: $1.00 (7.7%). Expected
2017 dividend: $1.00 to $1.05. Low Target: $10.
High Target: $20.
5/31/17 Price: $13.64. YTD Dividend: $0.257 (2.0%)
Annualized Dividend: $1.028. YTD Total Return: 7.1%
I took a deeper look at Solar-only Yieldco 8point3’s
plans to refinance its company level debt with amortizing debt
in March. The company abandoned these plans April when one of
its sponsors, First Solar (FSLR),
announced that it was considering selling its stake in the Yieldco.
While I believe the refinancing plans were prudent, I found that
they would have reduced 8point3’s CAFD below the level needed to
sustain its current dividend. To make matters worse, the
Yieldco announced a dividend increase while the refinancing plans
were still in place. This behavior basically meant that
8point3 was hoping that its unsustainable dividend increases would
cause investors to buy the stock and drive up the stock price.
This hoped-for stock rebound would allow 8point3 to make new
investments and increase cash flow enough to avoid a dividend cut.
In short, 8point3 was acting like it expected a return to the
Yieldco bubble of 2014 and early 2015.
The abandonment of 8point3’s (prudent) plans to refinance its
company-level interest only debt with project-level amortizing debt
leaves sufficient cash flow to pay its current dividend, but does
not address the reason for that plan in the first place.
8point3’s debt matures in 2020, and it is an open question if
lenders will be willing to refinance it at comparable terms.
If the stock price recovers, the company will issue new equity and
grow itself out of the problem. If not, the only option open
to 8point3 in 2019 may be refinancing with project level, amortizing
debt. That will greatly reduce CAFD, leading to a large
dividend cut. The company’s recent dividend increases only
make this future problem worse.
This strategy of hoping that the stock market will bail the company
out of its financing problems, at the same time as one (if not both)
of its sponsors are looking for the exits is, in my opinion,
irresponsible corporate management. While the high yield puts
a floor on the stock price in the near term, I believe that long
term investors are becoming increasingly skeptical of the
company. This skepticism should also put a ceiling on the
share price, and prevent management’s hopes of a share price
recovery from coming to fruition.
As the maturity of 8point3’s debt moves closer, the consequences of
the inevitable refinancing will loom larger in investors’
minds. I don’t know when it will happen, but at some point,
the stock price will have to drop to reflect 8point3’s much lower
expected CAFD and dividend after refinancing.
Because of this, I have started selling short calls on the stock, in
order to profit from my prediction that the share price is likely to
be capped in the near term, and fall in the medium term.
Sustainable Infrastructure (NYSE:HASI).
12/31/16 Price: $18.99. Annual Dividend: $1.32
(7.0%). Expected 2017 dividend: $1.34 to
$1.36. Low Target: $15. High Target: $30.
5/31/17 Price: $21.91. YTD Dividend: $0.33
(1.7%). Annualized Dividend: $1.32. YTD Total
In my last update, I said that Hannon Armstrong’s recent secondary
stock offering had depressed the stock and that the then current
price of $19.20 represented a buying opportunity. The stock
of this sustainable infrastructure financier has since risen
14%. The dividend is still attractive and it still has
plenty of room for gains, but is no longer a screaming deal.
The first quarter earnings release was admirably boring, showing
Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36. Annual Dividend: $1.00 (6.5%).
Expected 2017 dividend: $1.00 to $1.10. Low
Target: $12. High Target: $25.
5/31/17 Price: $17.20. YTD Dividend: $0.53.
Annualized Dividend: $1.08. YTD Total Return: 15.5%
Yieldco NRG Yield (NYLD
and NYLD/A) had a mixed quarter, with improved availability of
its wind and solar assets, offset by unfavorable weather. It
does not matter how well your solar plant is running if it does not
stop raining. The company’s conventional fleet also had
problems with forced outages, although some of the losses were
recovered through insurance.
These problems were mostly offset by new acquisitions.
Although, like many Yieldcos, NRG Yield’s share price has been
depressed, its stock price has been recovering and it is able to
raise some equity capital to accretively invest in new
projects. It also has $144 million in availability from its
existing borrowing facilities. This growth potential means
that the Yeildco is still on track to raise its dividend by 15% in
2017 over the previous year.
Nor should it lack for projects to buy. In addition to its
identified ROFO list, its parent NRG is under pressure to sell its
renewable businesses from an activist shareholder. This might
lead to accelerated purchases of some assets at better-than-expected
Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35. Annual Dividend: $0.65 (3.4%).
Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.
High Target: $30.
5/31/17 Price: $20.89. YTD Dividend: $0.25 (2.6%).
Annualized Dividend: $1.00. YTD Total Return: 10.6%
Atlantica Yield continues to impress me, but not the
market. Along with first quarter earnings, the company
announced that it had “obtained a waiver in Kaxu which waives any
past potential cross-default with Abengoa in the project finance
agreement.” After Kaxu, the company needs to obtain only one more
such waiver in order to free itself from the after-effects of its
former parent Abengoa’s
The remaining project, ACT, represents 300 MW of conventional power
generation in Mexico, and accounted for 13% of revenue in
2016. The muted reaction of investors to first quarter
earnings may have been in response to the company’s decision not to
raise the dividend until it obtains the final waiver for ACT.
Given ACT’s share for revenue and cash flow, the board could have
easily justified increasing the quarterly dividend to $0.30.
The fact that they chose to keep the dividend at $0.25 is the exact
opposite of the “raise the dividend and hope investors come”
strategy that concerns me at 8point3 Energy Partners (see
Contrasting Atlantica and 8point3
In sharp contrast to 8point3, Atlantica is preserving corporate
capital and using it to make small investments which will lead to
long term dividend growth, such as the $10 million investment in a
California-Arizona transmission line announced in the first
Like all income investors, I like dividend increases, but I like
prudent uses of capital even more. With Yieldco stocks still
out of favor, it’s much better to fund growth with retained cash
flow as Atlantica is doing than to squander current resources in the
hope that the stock price will recover and shareholders will be
willing to fund today’s dividend increase after it has already
Another telling point of contrast between Atlantica and 8point3 is
Atlantica’s stated 3x target for the ratio of corporate level debt
to pre-debt service CAFD. For Atlanica, this ratio stood at a
cautious 2.6 at the end of the first quarter. 8point3 does not
use (or at least disclose) this ratio, but we can estimate it.
For 2017, 8point3 is projecting approximately $95 million of CAFD
and $25 million of debt service. All $714 million debt is
corporate level, so 8point3’s outlook puts the same ratio at just
below 6- twice Atlantica’s target.
The point of a ratio like this is to ensure that changes in the cost
of servicing corporate debt will have a limited impact on
dividends. 8point3 is currently paying 3.5% per year for debt
service. This must be refinanced by 2020. If it is all
refinanced at the same 5% rate as Atlantica just refinanced some of
their corporate level interest-only debt, the annual debt service
cost will rise from $25 million to $36 million, reducing annual CAFD
to $80 million, or $1 per share.
Even this is a best-case scenario that assumes no the company can
refinance everything with interest only debt. If 8point3 tried
to meet Atlanitca’s 3 times target, it would need to refinance more
than half of its debt with amortizing project level debt, annual
CAFD would fall to $0.88 a share. That puts the current dividend
rate of $1.08/year at 123% of 8point3’s long term sustainable
CAFD. This ratio of dividends to CAFD is called the payout
ratio, and most Yieldcos target payout ratios of 80% to
90%. Atlantica’s target payout ratio is 80%, and its
current dividend of $0.25 per quarter is only 56% of CAFD guidance
for 2017. This leaves a lot of room for Atlantica to increase
its dividend later this year.
Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54. Annual Dividend: $1.36 (5.3%).
Expected 2017 dividend: $1.38 to $1.50. Low
Target: $20. High Target: $40.
5/31/17 Price: $34.54. YTD Dividend: $0.718
(2.8%). Annualized Dividend: $1.46. YTD Total
NextEra Energy Partners also compares favorably
with other Yieldcos on measures such as payout ratio and company
level debt. Its outlook for long term CAFD from its current
properties is approximately $310-340 million, or $2 to $2.20 per
share, compared to 2017 distributions of $1.58-$1.62 per
share. That gives a payout ratio of around 80%.
Management does not plan not to issue additional equity until the
share price recovers. If the share price does not recover, the
company may have trouble delivering on it 5 year dividend growth
target of 12% to 15% per year, but not until at least 2019, and
there is no danger of a dividend cut like the one we could see for
8point3 in the same time frame. And in Nextera Energy
Partners’ case, the necessary share price recovery is already
Other Income Stocks
Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60. Annual Dividend: $1.00
(6.4%). Expected 2017 dividend: $1.00 to
$1.06. Low Target: $10. High Target: $30.
5/31/17 Price: $14.75. YTD Dividend: $0.25 (1.6%)
Annualized Dividend: $1.00. YTD Total Return: -3.9%
Along with Atlantica, waste-to-energy developer and operator
Covanta continues to suffer because of market weakness in power
prices and commodity metals. Earnings were significantly
negative at -$0.41 per share, but like Yieldcos, much of this loss
is in the form of depreciation, and so it does not have much
bearing on the company’s ability to maintain its dividend.
The company’s Free Cash Flow guidance for 2017 is $100 million to
$150 million, which should be sufficient to maintain its $129
million in annual dividend payments until cash flow increases
because of growth investments or recovering commodity markets.
The company’s Dublin facility accepted its first waste delivery
and remains on track for commercial operation in the fourth
quarter of this year.
Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94. Annual Dividend: $2.05
(10.3%). Expected 2017 dividend:
$2.05. Low Target: $18. High Target: $27.
5/31/17 Price: $21.22. YTD Dividend: $1.023 (5.1%).
Annualized Dividend: $2.05. YTD Total Return: 11.3%
Leading independent charter owner of container ships had a very
bullish first quarter earnings report, noting that the weakness in
pricing container ship leases seemed to have hit bottom.
Other shipping companies, such as Maersk (MAERSK-B.CO)
have noted similar improvements. Despite this, the company’s
common stock continued to drop in May, and its preferred stock
(such as SSW-PRG) has not delivered significant gains. I
think this makes now a particularly good time to buy the company’s
preferred shares, or even speculate on a sharp recovery of the
common stock. I did both in recent weeks, buying a little of
both the preferred E and H series shares, and buying some long
dated $7.5 calls on the common stock as it temporarily fell to
MiX Telematics Limited
12/31/16 Price: $6.19. Annual Dividend: $0.14
(2.3%). Expected 2017 dividend: $0.14 to
$0.16. Low Target: $4. High Target: $15.
5/31/17 Price: $7.12. YTD Dividend: $0.037
(0.6%). Annualized Dividend: $0.14. YTD Total
Everything seems to be coming together for vehicle
and fleet management software as a service provider MiX
Telematics. For the last 2-3 quarters, we’ve been seeing
renewed growth in subscriptions in most of the company’s
segments. Subscription revenue came in ahead of guidance for
the fourth quarter and fiscal year ending March 31st.
The recovery of oil prices to around $50 a barrel has led to a
rapid increase in activity should lead to renewed growth in
subscriptions MiX’s oil and gas customers. This segment was
a drag on MiX’s results in 2016, but should continue to be a
tailwind for the rest of this year.
Aspen Aerogels (NYSE:ASPN)
12/31/16 Price: $4.13. Annual Dividend and expected 2017
dividend: None. Low Target: $3. High Target: $10.
5/31/17 Price: $4.52. YTD Total Return: 9.4%
As I expected, Aspen Aerogels delivered unimpressive
first quarter earnings. What I did not expect was that the
stock would rally for no reason I could see other than a good long
term valuation even if the near term prospects still seem
weak. When a stock falls for no reason I can determine, I
usually buy. When it rises, as Aspen did, I remain on the
Although the world political and economic climate remains volatile,
the US stock market has remained calm so far this year. How
long that can continue is anyone’s guess, but I think defensive
investments like cash, attractively valued income stocks, and real
income investments like home solar remain the best places to put
On home solar, I recently published an article comparing it as an
investment to commonly held mutual funds. Spoiler: the
mutual funds did not fare well. For defensive income
stocks, Atlantica Yield, Covanta, and Seaspan Preferred shares are
all looking very attractive right now. As for cash, keep some
around. I suspect we will see some much better valuations in
the stock market over the next 6 months to a year.
Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CVA, ABY, NEP,
SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective
short position held as a hedge on SSW-PRG. Short calls on
DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and
such opinions are subject to change without notice. This
article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein
should not be considered as investment advice or a
recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
– Best stock to invest in