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Why dividend investors should avoid TerraForm Power

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TerraForm Power (NASDAQ:TERP) is a leading renewable YieldCo that owns and operates renewable generation resources. Brookfield Renewable Partners (NYSE:BEP), one of the largest renewable investment firms in the world, has a 51% ownership of the company. TERP’s portfolio comprises of renewable energy facilities situated in the United States, Canada, Chile and the United Kingdom with a combined size of 2,606MW, of which 41% from solar and 59% from wind.

TERP presently reported a baffling first-quarter results, with lower-than-expected Adjusted EBITDA and CAFD, driven mainly by lower wind speeds and technical hitches at a portion of its wind farms, causing low wind obtainability. However, TERP is going on with its acquisition of Saeta Yield, which is supposed to be significantly accretive on a CAFD per share basis, and will bolster constant growth in dividends the coming years, even with reducing TERP’s liquidity available and increasing its leverage. TERP, for the most part sells its electricity through off-take contracts, with a present average assurance of 14 years. There have been no changes to TERP’s portfolio over the quarter.

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TERP as of now, offers around 6.9% yield and projects dividend growth of 6 to 8% advancing. However, the returns from its deliberate acquisition of Saeta appears to be fading due to market volatility. TERP anticipates raising its dividend 6 to 8% over the coming years, which will speak to yield focused investors. It additionally plans a total return within the low- to mid-teens. This plan is up c contrasted with a conclusive 12% anticipated in earlier presentations.

TERP hopes to profit from not only appealing to yield-focused investors but also those needing the entire bundle, which is a strong total return. This perception discloses to me the adjustment in focus by management concerning mergers and acquisitions or M&A. Before, management appeared focused around cost savings and finding savings within, which they say would help them to grow the dividend by 6 to 8% annually at first. Nevertheless, now management is talking about different opportunities and acquisitions outside of Saeta.

These acquisitions are considerably smaller than Saeta and from what management has uncovered seem to not need extra equity to be issued. Remember that TERP’s total power generation does not include Saeta’s part once it is consolidated. This implies these recently reported plans add 1% total if all 21 megawatts are bought.

Futhermore, TerraForm Power (NASDAQ:TERP) has a negative payout ratio, which implies that it is a misfortune-making, and paying its dividend from its held earnings. If dividend is a main standard in your investment thought, then you have to ensure the dividend stock you’re looking at out is dependable in its payments. Actually, I think it is too early to consider TERP as a dividend investment. It has only been consistently paying dividends for 4 years, however, typical practice for dependable payers is to look for a ten-year minimum track record. Contrasted with its peers, TERP has a yield of 6.93%, which is high for Renewable Energy stocks.

In any case, I think TERP can be a good stock but for now, investors should be careful investing in it for the dividend. Then again, if you are not entirely just a dividend investor, the stock could still be offering some interesting investment opportunities. I recommend that investors must try and get a good understanding of the basic business and its fundamentals before considering investing.


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