The Yieldco Virtuous Cycle

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Readers who followed my coverage of the Yieldco bubble in 2015 know the Yieldco Virtuous Cycle.  

  1. A Yieldco’s stock price rises
  2. It issues new shares, and invests the money in renewable energy projects.  
  3. Because the stock price is high, it is able to buy more project cash flow by issuing fewer shares than it has in the past.
  4. Cash flow available for distribution (CAFD) per share increases, despite the increasing number of shares outstanding.
  5. Yieldco management sets a target for continued rapid annual distribution growth, which can be met either by further share issuance (if the share price continues to increase), increasing the payout ratio (the percentage of CAFD used to pay dividends) or borrowing.
  6. The share price rises in response to rising expectations of CAFD per share growth, allowing management to repeat the cycle.

This cycle ran from 2013 to mid-2015, when the public Yieldcos at the time got too greedy, issuing more shares than the market could absorb.  Share prices stopped rising rapidly, so Yieldcos turned to increased debt and increased payout ratios in order to meet their lofty dividend per share growth targets. They hoped that share prices would accelerate again while their payout ratios were still below 100% and banks were still willing to finance their debt.

But the writing was on the wall. Yieldco share price growth can continue indefinitely as long as investors believe it will. But, like Tinkerbell, the Yieldco bubble popped as soon as investors stopped believing in it.  The virtuous cycle turned viscous.

By the end of 2015, many Yeildcos had fallen enough that their stocks were attractive even without assuming any dividend per share growth. That’s not where we are now. Although valuations feel very lofty, the past few years of fiscal discipline has led to lower payout ratios and reduced debt burdens.  Combine these with current high share prices, and conditions are right to kick off a new Yieldco virtuous cycle and boom.

A New Yieldco Boom

Most Yieldcos’ share prices have increased rapidly in the second half of 2020.  This sets the stage for a new Yieldco boom, with a new virtuous cycle of rising share prices, expectations of dividend per share growth, and new investments beginning to take off. Given the momentum of the divestment movement, a new Yieldco boom seems likely.  If a new boom is going to happen, the best Yieldcos to buy today will be the ones with the lowest current dividend yields, because they can raise the cheapest capital in new secondary offerings and they will be able to promise the fastest dividend per share growth.

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Disclosure: Long CVA, GPP, AGR, BEP, BEPC. Short calls on BEPC.

Disclaimer: Past performance is not a guarantee or a reliable indicator of future results.  This ...

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