Brookfield Renewable(NYSE: BEP)(NYSE: BEPC) is a unique clean energy investment. There are multiple reasons for this, but one of the most important often gets overlooked by investors. Here's why Brookfield Renewable is an interesting way to play the clean energy transition and why you have to go in with your eyes open if you decide to buy it.
What does Brookfield Renewable do?
Brookfield Renewable owns, operates, and builds clean energy assets. So it produces and sells electricity. Most of its assets have long-term contracts, so the revenues it generates tend to be fairly stable over time. Given this high-level view, some investors might consider it as something similar to a utility. That view is buttressed by the lofty yield Brookfield Renewable offers. The partnership share class is yielding 6.8% today while the corporate share class is yielding 5.7%.
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At this point, investors should be asking why there are two different share classes, which is the first hint that something about Brookfield Renewable is unique. Effectively, the two share classes represent the same entity and have all of the same basic attributes (including the size of the dividend). The reason the yield is different is because there is simply more demand for the corporate version. The partnership is generally intended for small investors, while the corporate class is meant for larger investors who aren't allowed to own partnerships, such as pension funds. And both classes are simply a way for Brookfield Asset Management(NYSE: BAM) to raise capital.
Now, investors should be asking what large Canadian asset manager Brookfield Asset Management has to do with all of this. Brookfield Asset Management runs Brookfield Renewable and a number of other infrastructure-focused companies. These public entities are a way for Brookfield Asset Management to raise "permanent" capital (it is permanent because it doesn't have to be paid back as a loan would require). Buying Brookfield Renewable means you are investing alongside Brookfield Asset Management.
Brookfield Renewable is not a utility
An asset manager doesn't operate its business like a utility. While both will clearly own large physical assets that throw off reliable cash flows, a utility is far more likely to have assets that will be held for the long term. Brookfield Renewable's portfolio is always changing. Sure, there are some assets that probably won't be sold; hydroelectric power is highly attractive partly because it can only be built in very specific areas. But Brookfield Renewable regularly buys and sells assets.
That fits with the asset management approach of the company that runs Brookfield Renewable. It is always looking for underpriced assets that it can buy. It then attempts to increase the value of the assets by improving them and running them at a high level. If it can get a good price, it will sell assets. The process can then be repeated. For example, through the first nine months of 2024, Brookfield Renewable set a record for asset recycling, as it calls the process, with nearly $1 billion in sales proceeds.
What investors need to know here is that this approach is a core aspect of Brookfield Renewable's business model. And while the asset recycling numbers will vary over time, asset sales are likely to trend higher as the business grows in size. Simply put, the bigger Brookfield Renewable gets the more assets it will have to sell. Add in the business's increasing focus on building assets from the ground up, and asset sales could be even more robust in the future.
The implication for investors
There are a number of takeaways here with regard to owning Brookfield Renewable. First, this investment is not interchangeable with a utility. Second, buying and selling assets is likely to mean more volatility in financial results. Third, if you aren't OK with an active portfolio model, you probably shouldn't own Brookfield Renewable. And that remains true no matter how attractive the dividend yield is or how big an opportunity lies ahead in the clean energy sector. If you aren't on board with Brookfield Renewable's core investment approach, you should keep looking for a business that better fits your needs.
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Reuben Gregg Brewer has positions in Brookfield Renewable Partners. The Motley Fool has positions in and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
