Tom Konrad Ph.D., CFA
The year got off to a spectacular start for my tenth annual Ten Clean Energy Stocks model portfolio. (You can read about the performance in 2016 and prior years here.) The portfolio and its income and growth subportfolios were up 9%, 8%, and 14%, respectively. Clean energy stocks in general also did well, with my three respective benchmarks up 2 to 3% each. (I use the YieldCo ETF YLCO as a benchmark for the income stocks, the Clean Energy ETF PBW as a benchmark for the growth stocks, and an 80/20 blend of the two as a benchmark for the whole portfolio.) The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage returned 5%.
Detailed performance is shown in the chart below:
I attribute the impressive January numbers to several factors.
- Despite anti-climate rhetoric, renewable energy has reached a tipping point, and investors are beginning to realize that (as I said in a recent interview on CNBC Asia) the Trump Administration will be less of a headwind for clean energy than a reduced tailwind.
- A rebound from December tax-loss selling (SSW-PRG and ASPN).
- Expected good new materializing (ABY)
- Unexpected good news (NEP).
I’ll look into these faqctors in detail in the individual stock discussion below.
Below I describe each of the stocks and groups of stocks in more detail.
Pattern Energy Group (NASD:PEGI)
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.
1/31/17 Price: $19.74. YTD Dividend: $0. Annualized Dividend: $1.63. YTD Total Return: 3.9%
Pattern is a Yieldco owning mostly wind projects in North America. With little news in January, the stock advanced along with other Yieldcos recovering from a Trump-inspired sell off.
8point3 Energy Partners (NASD:CAFD)
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.
1/31/17 Price: $13.54. YTD Dividend: $0. Annualized Dividend: $1.00. YTD Total Return: 4.3%
Solar-only Yieldco 8point3 reported fourth quarter earnings on January 26th. Although the company upped their guidance and distribution, analysts were not thrilled. The YieldCo is considering refinancing some of its company level, interest-only debt using project-level amortizing debt. In terms of safety of the stock, this is a good move because it eliminates refinancing risk. However, amortizing debt requires payment of both interest and principal, which will reduce cash available for distribution.
The concern is that this might lead to a future dividend cut, unless the company can continue to grow enough to offset the future principal payments. Management thinks it can, since they issued guidance for 12% distribution growth in 2017.
Hannon Armstrong 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.
1/31/17 Price: $18.28. YTD Dividend: $0. Annualized Dividend: $1.32. YTD Total Return: -3.7%
Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure Hannon Armstrong drifted lower despite a lack of news. I continue to consider it very attractive at this level.
NRG 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.
1/31/17 Price: $16.25. YTD Dividend: $0. Annualized Dividend: $1.00. YTD Total Return: 5.8%
NRG Yield (NYLD and NYLD/A) drifted higher along with other YieldCos on a lack of significant news. Two activist investors have revealed a stake in NRG Yield’s parent, NRG Energy (NRG). While they will be pushing for changes at NRG, I don’t expect any significant changes at NRG Yield until its stock price recovers to the point where it again has the ability to raise equity without diluting existing shareholders.
Atlantica 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.
1/31/17 Price: $21.40. YTD Dividend: $0. Annualized Dividend: $0.65. YTD Total Return: 10.6%
Althoughthe news feeds have been silent on the subject, I tweeted some big news at Atlantica Yield on January 13th:
Breaking: $ABY Atlantica Yield receives forbearance from DoE. Should allow annual dividend increase to at least $1.15. Bought @ $19.70
The news came from a 6-K filing with the SEC. The forbearance means that funds which had been previously trapped at Alanitca’s Mojave and Solana project subsidiaries can now be used at the company level to pay distributions to shareholders. They related to ownership stakes of its former parent, Abengoa in Atlantica Yield which were reduced because of Abengoa’s bankruptcy. Atlanica is still working on obtaining similar forbearances for its ACT and Kaxu projects in Mexico, but the Mojave and Solana account for the majority of the outstanding forbearances in terms of the cash flow of the underlying projects.
As I said in the tweet, I anticipate that the next quarter’s dividend will be at least $0.29 ($1.15 at an annual rate) up from $0.16. The remaining forbearances should allow Atlantica to inc
rease its quarterly distributions to at least $0.36 ($1.45 annually.) I expect the stock to rise further when the anticipated dividend increase is announced.
NextEra 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.
1/31/17 Price: $31.53. YTD Dividend: $0. Annualized Dividend: $1.41. YTD Total Return: 23.45%
NextEra Energy Partners released its fourth quarter earnings on January 27th. Not only did it extend its 12% to 15% distribution growth outlook for the next five years, but the company’s parent, NextEra (NEE) agreed to reduce its Incentive Distribution Rights (IDR) from 50% of incremental distributions to 25%. With more of the money going to NEP shareholders, it seems much more likely that NEP will be able to achieve its aggressive distribution growth target.
Other Income Stocks
Covanta 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.
1/31/17 Price: $16.1. YTD Dividend: $0. Annualized Dividend: $1.00. YTD Total Return: 3.2%
Waste-to-energy developer and operator Covanta drifted upwards without significant news. The stock did have a hiccup on January 9th when it was revealed that county officials in Maryland were investigating a fire at one of its facilities in December. I don’t expect this investigation will have a significant impact on the company’s profitability going forward.
The company is preparing to commence operations at its newest facility in Dublin, Ireland in March.
Seaspan Corporation, 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.
1/31/17 Price: $22.70. YTD Dividend: $0.51. Annualized Dividend: $2.05. YTD Total Return: 16.4%
The stock and preferred shares of leading independent charter owner of container ships recovered strongly in January in what I believe was a rebound from tax loss selling. They have fallen back significantly in the first couple days of February when Morgan Stanley initiated coverage of the common shares at “Underweight.”
The reasoning behind this rating rests on a probably cut in the common’s dividend which I also anticipate. A dividend cut for the common shares will only make the preferred dividends safer, hence the sell-off in SSW-PRG is unjustified, and this is a good opportunity to buy the preferred if you did not get a chance before it rose at the start of the year.
MiX Telematics Limited (NASD:MIXT).
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.
1/31/17 Price: $7.14. YTD Dividend: $0. Annualized Dividend: $0.14. YTD Total Return: 15.3%
Vehicle and fleet management software as a service provider MiX Telematics rose in January, perhaps in anticipation of strong quarterly results to be announced on February 2nd. I have not finished reviewing these results as I write, but they were very good.
Aspen Aerogels (NYSE:ASPN)
12/31/16 Price: $4.13. Annual Dividend and expected 2017 dividend: None. Low Target: $3. High Target: $10.
1/31/17 Price: $4.66. YTD Total Return: 12.8%
Aspen Aerogels rebounded from last year’s lows most likely due to the abatement of tax loss selling, since there was no news of any significance. The company will release its fourth quarter results on February 23rd/
All in all, it was a great January for my model portfolio. The shock of the Trump victory last November caused clean energy stock to sell off regardless of what the new President and the Republican Congress are likely to do now that they are in control of government. This sort of panic selling leads to opportunities for calmer investors, and I think this is part of the explanation of my outsized one month gains.
The pleasant surprises in NextEra Energy Partners’ and MiX Technologies’ earnings, and the anticipated good news from Atlantica Yield added to the gains. I can only hope that so many of my predictions (not to mention dumb luck) will continue to go my way for the rest of the year.
Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP. Long puts on SSW (an effective short position held as a hedge on SSW-PRG.)
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 guaranteed.