Atlantica Sustainable Infrastructure (NASDAQ:AY) seems to be an exceptional choice for those seeking green energy stocks with sustainable income prospects. What makes Atlantica stand out from its peers is not only its appealing 6.3% dividend yield but also its unique qualities, which offer high predictability when it comes to its future financials. Further, the recent correction in the stock has opened up a wider margin of safety and the potential for significant upside potential. Accordingly, I am bullish on the stock.
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What are Atlantica Sustainable Infrastructure’s Unique Qualities?
Atlantica Sustainable Infrastructure’s investment case as a great income stock is backed by its unique qualities. These include a well-diversified asset base, its multi-year, inflation-protected power purchase agreements (PPAs), and its tremendous off-taker (customer) base. Let’s take a look at these.
Atlantica’s Asset Base
Atlantica’s asset base is well-diversified, comprising 44 renewable energy projects across all categories, with the capacity to generate 2,161 MW of total renewable energy. Specifically, 31 of the company’s renewable energy sources comprise solar and wind farms, seven are transmission and transport projects, three are efficient natural gas projects, and three are water projects.
Atlantica’s asset base is not only diversified from an asset class point of view but also from a geographical perspective. Only about 41% of its assets are located in North America. Europe and South America contain 34% and 17% of its assets, respectively. The remaining 8% of its assets span across the globe, including countries such as South Africa and Algeria.
Exceptional Cash-Flow Visibility
Atlantica’s sustainable dividend is underpinned by the company’s asset base, which is tied to multi-year power purchase agreements that offer exceptional cash-flow visibility and reduced risk. With an average remaining contract life of approximately 14 years, Atlantica’s future cash flows are virtually certain, allowing management to prudently plan future investments and dividend growth.
However, it gets even better. An impressive 47% of the company’s assets are linked to inflation-based formulas or indexed to a specified number of hikes over time. This means that, despite the current surge in inflation, Atlantica’s assets are well-protected and, in fact, can benefit as rising expenses are covered by its off-takers.
High-Quality Off-Takers
Atlantica’s impressive PPEs would mean little if they weren’t backed by high-quality off-takers that can adequately commit to them. In fact, Atlantica’s off-takers are extremely creditworthy, therefore capping the company’s counter-party risks.
Most are government-linked entities or renowned companies in the energy sector, which makes it quite unlikely that they would default on their contractual obligations. Namely, some of Atlantica’s off-takers include UTE (The National Administration of Power Plants and Electrical Transmissions in Uruguay), CNE (National Energy Commission of Chile), Sonatrach/ADE (Algeria’s state-owned oil company), Enel Generacion Chile (NYSE:ENIC) (a public company with strong and transparent financials), The Government of Peru, and The Kingdom of Spain.
Moreover, despite Atlantica’s significant international presence and reliance on off-takers abroad, an impressive 90% of the company’s cash flows are either received in USD or hedged to the USD. This provides an added layer of protection for the company’s overall cash-flow visibility, shielding it from currency fluctuations and other risks associated with overseas exposure.
Unique Qualities Drive Robust Results
Thanks to its distinctive features, as mentioned earlier, Atlantica has been able to deliver impressive results in various economic environments. Even in the challenging macro environment of 2022, the company’s multi-year PPAs generated resilient cash flows, leading to another rock-solid year for Atlantica.
Adjusted EBITDA for the year came in at $797.1 million, a 1.5% increase compared to 2021. Hence, cash available for distribution (CAFD) increased by 5.5% over the prior-year period to $237.9 million or by 2.0% to $2.07 on a per-share basis.
The mismatch between the total CAFD and the per-share metric is due to a larger number of outstanding shares that were issued by Atlantica to fund the investments and acquisitions that took place during this period. Still, with Atlantica posting growth on a per-share basis, it’s clear that these acquisitions were accretive to profitability and, thus, fruitful for current shareholders.
Atlantica’s Dividend Prospects
Atlantica’s dividend prospects are quite strong due to the stability that its unique qualities offer. Thanks to the resilience and predictability of its cash flows, Atlantica has been able to raise its dividend for seven years in a row.
Atlantica’s management is confident that the company’s current PPA profile, recent investments, and ongoing development pipeline will result in cash available for distribution of between $235 million and $260 million for 2023. Assuming the company achieves the midpoint of this range and modestly dilutes shareholders, CAFD/share in FY2023 is likely to come in close to $2.07, which is consistent with last year’s performance.
Therefore, the company has ample room to keep growing the dividend from its current annualized rate of $1.78. Atlantica’s 6.3% yield remains well-covered from a payout ratio perspective and well-insulated from an operating perspective due to the company’s robust attributes.
Is AY Stock a Buy, According to Analysts?
Turning to Wall Street, Atlantica Sustainable Infrastructure has a Moderate Buy consensus rating based on three Buys and three Hold ratings assigned in the past three months. At $31.83, the average Atlantica Infrastructure price target implies 12.4% upside potential.
Conclusion
While the company’s future revenue growth may be partly offset by a dilutive offering, as is typical in the industry, its portfolio is well-diversified, with its high-quality assets attached to long-term PPEs that include inflation-linked rate hikes. This makes it an attractive investment option for income-oriented investors seeking exposure to the renewable energy industry with limited risks.
The combination of these unique features is expected to continue to generate robust revenues for the company for years, if not decades, to come, allowing shareholders to continue enjoying a high-yielding, well-protected dividend.
