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 Yield companies - commonly called "yieldcos" - are spinoffs of
alternative energy companies that own assets such as wind or solar
farms and pay investors dividends out of the cash flow generated by
long-term contracts to sell power to utility companies. Though many
investors have never heard the term, yieldcos are popping up in the
portfolios of some of the most widely-held mutual funds in the
United States.
After a broad push into the sector, more than 900 actively managed
and passive funds now own at least one yieldco, according to Lipper
data. Notable buyers include the $29.3 billion BlackRock Equity
Dividend Fund and the $9.2 billion T. Rowe Price Small-Cap Stock
fund.
"We see these as a way to get a decent yield now and high likelihood
into the yield growing substantially in the future," said Scott
Moore, the lead portfolio manager of the $33.4 million Buffalo
Dividend Focus Fund, the top-performing dividend fund so far this
year, according to Morningstar data. He said he expects to add
several yieldcos over the next year.
Just a year ago, yieldcos were practically non-existent in U.S.
portfolios. Since then, solar and other alternative energy companies
have spun off almost a dozen of the companies as a way to raise cash
and to create a buyer for their completed projects, effectively
separating the manufacturing part of their businesses from the
revenue generated from past projects. Yieldcos, for their part,
often have a right of first refusal to purchase projects such as a
solar farm from their parent company, and may also acquire completed
assets from independent companies.
NRG Yield, a spinoff from parent company NRG Energy, is widely seen
as the first North American yieldco. Since it began trading on July
2013, approximately a dozen yieldcos have begun trading on U.S.
exchanges, including Nextera Energy Partners, TerraForm Power and
Abengoa Yield, with each offering dividend yields of approximately 4
percent or more. In most cases, the parent company retains an
ownership stake of 70 percent or more in the spinoff.
A dividend yield is a ratio that shows how much a company pays out
in dividends relative to its share price, so that a company with a
share price of $20 and a dividend of $1 has a dividend yield of 5
percent.
Investors in yieldcos say that they are attracted by the prospect of
growing dividend payments, while at the same time tapping into the
expanding alternative energy sector without the risk of turbulent
commodity prices. Yet over the last month, yieldcos have proven to
be no less volatile than the stocks of their parent companies.
The prospect of rising interest rates in the U.S. have sent the
shares of several yieldcos reeling over the last month, not long
after many of these same companies jumped twenty percent or more at
their initial public offerings. TerraForm Power, a subsidiary of
SunEdison that owns solar farms in the US, Canada, and Chile, has
fallen 15 percent over the last month along with the shares of its
parent company. Abengoa Yield, a spinoff of Spanish energy
construction company Abengoa, has dropped 14 percent, compared with
its parent company's 23 percent drop.
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INVESTOR ATTRACTION
Angie Storozynski, an analyst at Macquarie Research, said that
recent price declines have more clients asking about the sector.
"We’ve seen a lot of interest in yieldco stocks as of late given the
sharp pullback in the names, which seems driven by their limited
liquidity and some global growth worries," she said.
Abengoa Yield, whose portfolio of assets includes a solar farm in
the Mojave desert, wind farms in Uruguay and electric lines in Peru,
now makes up his second-largest position, just behind Apple Inc.
Based on conversations with Abengoa Yield, he expects the company to
raise its annual dividend payout to $1.68 per share from its current
$1.04 per share by 2016, which would increase its dividend yield to
nearly 6 percent from its current 3.2 percent, based on its current
share price.
With Abengoa, "you have a very stable asset base and contracts with
an average life of 26 years, plus inflation escalators," Moore said.
"As long as Abengoa keeps completing projects that they can sell to
the yieldco, which they have done for 70 years, we have no doubt
that its asset base will grow."
GROWTH QUESTIONS
Acquiring additional assets in order to raise their dividend payouts
is a chief aim of yieldcos.
Storozynski, the Macquarie Research analyst, initiated coverage of
the sector on September 17, giving those yieldcos with a strong
parent company and a proven development pipeline such as
NextraEnergy Partners and NRG Yield an outperform rating. She gave
Pattern Energy and other independent yieldcos a 'hold' rating,
largely as a result of the fact that they may not have a right of
first refusal to buy completed projects from a parent company such
as SunEdison.
"The role of a sponsor as a growth driver grows in importance as
public yieldcos multiply, inflating the value of contracted
renewable power projects. The yieldcos relying predominantly on
third party acquisitions for growth should therefore rush to secure
growth projects, even if they feel that current project valuations
look bloated," she wrote in a Sept 17 note to clients.
The competition among yieldcos to buy assets, thereby boosting
prices, is giving some investors in the alternative energy sector
pause.
"For me the big worry about these assets is that they will have to
reinvest incredibly well over time to justify their prices," said
Edward Guinness, who runs the Guinness Atkinson Alternative Energy
Fund and invests in several solar companies. "I am skeptical as to
whether in 20 years time these companies will be persevering and
returning capital at the forecast rates."
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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