Renewable-energy-related investments have lost investor interest lately. With the Ukraine/Russia war escalating and the global geopolitical tensions in place, investors suddenly turned their backs on renewables and rushed back to the good ol’ fossil fuels. However, there are securities in the renewable energy sector that continue to offer a great investment case to investors seeking predictable income. My two favorite stocks in the space are Atlantica Sustainable Infrastructure (NASDAQ: AY) and Hannon Armstrong (NYSE: HASI).
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These are solid stocks for income-oriented investors to consider. Traditional energy stocks have always been good for income, and with current oil prices further benefiting the oil majors while strengthening their dividend-growth prospects, it makes sense why they have outperformed over the past few quarters.
However, I am quite interested in renewable energy infrastructure companies, which, unlike, say, a solar panel manufacturer, sign their assets under long-term contracts. Thus, they are well-positioned to enjoy predictable cash flows and therefore provide their shareholders with predictable and growing dividends.
Accordingly, I am bullish on both names.
What Backs Atlantica’s & Hannon Armstrong’s Dividend Predictability?
As I mentioned, the two companies sign their assets under long-term contracts, which reduces any uncertainty attached to their upcoming cash flows. However, let’s dive a bit deeper into their asset bases and the length of their contracts to get a better idea.
Atlantica Sustainable Infrastructure
Atlantica’s asset base showcases multiple qualities. The company owns 40 assets, with the renewable energy and efficient natural gas ones supporting 2,048 MW and 398 MW of aggregate energy installed generation capacity, respectively.
Specifically, Atlantica operates 26 renewable energy sources like solar and wind farms (making up 70% of cash flows available for distribution (CAFD)), three efficient natural gas projects (15% of CAFD), seven transmission and transport projects (12% of CAFD), and four water projects (3% of CAFD).
Every single dollar the company generates through these assets is contracted under long-term PPAs (power purchase agreements), boasting a weighted average remaining contract life of 15 years. For this reason, Atlantica is set to enjoy very predictable and secure cash flows for years and, in some asset cases, even several decades. For instance, its Chile TL4 asset is contracted until 2072!
The company is also sufficiently diversified geographically. In fact, around 46% of its cash flows are generated from North America, 31% from Europe, 15% from South America, and the remaining 8% from the rest of the world.
Another quality that contributes to the safety and predictability of Atlantica’s cash flows lies in its high-quality off-takers. They are incredibly creditworthy, lessening the company’s counterparty-related risks.
These off-takers include The Kingdom of Spain, UTE (Uruguay’s National Administration of Power Plants and Electrical Transmissions), Sonatrach & ADE (Algeria’s state-owned oil company), The Government of Peru, Enel Generacion Chile, and CNE (National Energy Commission of Chile), among other less-known but still investment-grade off-takers.
Now, the cherry on top of the cake: around 82% of Atlantica’s assets have their contractual rates linked to inflation, a formula based on inflation, or are linked to a fixed number of rate hikes over time.
Thus, the company is now only protected from the ongoing elevated inflation levels but can even benefit. Lastly, while operating all across the globe, all but 10% of Atlantica’s CAFD are accepted either in USD or are hedged against their local currencies. Consequently, the company features limited to no FX risks as well.
Hannon Armstrong
Hannon Armstrong’s asset base also features several attractive characteristics and is set to continue to produce low-volatility revenues for decades to come.
The company’s renewable energy portfolio is valued at roughly $3.9 billion and is split into three market divisions: Its Behind-the-Meter business (54% of assets) concentrates on operating solar power, electric storage, and other heat and power systems.
The Grid-Connected division (30% of assets) involves investments in grid-connected renewable energy projects, such as solar and off/on-shore wind projects. Finally, the rest of its assets are infused into sustainable infrastructure projects concerning the use of natural resources.
Overall, Hannon Armstrong has interests in about 350 investments, with a weighted average contract life of 14 years and an investment yield of around 7.5%. Therefore, Hannon Armstrong’s revenues are not only quite diversified, but due to the long-term, contractual nature of its revenues, it enjoys exceptional cash-flow visibility similar to Atlantica.
Over the long term, Hannon Armstrong’s portfolio is set to evolve even further. Its investment pipeline presently surpasses $4 billion, which indicates that the company’s asset base will eventually more than double.
What are the Price Targets for AY and HASI Shares?
As far as Wall Street’s sentiment goes, Atlantica Infrastructure has a Hold consensus rating based on four unanimous Hold ratings assigned in the past three months. At $37.25, the average Atlantica Infrastructure stock projection implies 13.7% upside potential.
Regarding Hannon Armstrong, the stock has a Moderate Buy consensus rating based on five Buys, one Hold, and one Sell assigned in the past three months. At $58.17, the average Hannon Armstrong price target implies 47.9% upside potential.
Conclusion: AY and HASI are Worth Considering for Sustainable Income
Renewable energy infrastructure stocks have been somewhat forgotten lately due to traditional energy equities experiencing notable tailwinds. However, 5.3%-yielding Atlantica Infrastructure and 3.8%-yielding Hannon Armstrong are not only set to continue growing their (already increasing annually) dividends but do so with a unique margin of safety due to the contractually-secured nature of their cash flows. Thus, income-oriented investors are likely to find these two names fruitful.
