Clearway Energy: My Largest Renewable Energy Position, 6.1% Dividend Yield (NYSE:CWEN) - Seeking Alpha

Clearway Energy: My Largest Renewable Energy Position, 6.1% Dividend Yield (NYSE:CWEN) | Seeking Alpha

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Whilst Clearway Energy (NYSE: CWEN.A) (NYSE: CWEN) has largely recovered from the NextEra Energy Partners ( NEP) inspired dip, the renewable energy yieldco is still down for the year and last declared a quarterly cash dividend of $0.3964 per share, a 1.9% increase sequentially for a 6.1% annualized forward dividend yield on the Class A shares. Clearway Energy has two outstanding common shares that receive the same level of dividends but trade at different prices, which means the Class A shares have a marginally higher dividend yield. The Class A shares also have 100 times the voting power of the Class C shares but less daily volume.
Clearway Energy Fiscal 2023 Third Quarter Presentation

The yieldco has paid out $130 million in dividends in 2023 with drop-downs from its sponsor set to power a target of 7% dividend per share growth in 2024. CWEN.A's sponsor is also its largest shareholder with a $1.8 billion equity stake to render strong alignment with public investors. The target is income and growth and CWEN's sponsor has a 29.1 GW development pipeline that is diversified across solar, new construction and repower onshore wind, and utility-scale energy storage.

Clearway Energy Fiscal 2023 Third Quarter Presentation

Hence, the drop-down opportunities for CWEN.A are huge, with around 1.73 GW of this currently under construction and another 852 MW in advanced stages. There are about 7 GW of late-stage projects in the pipeline over the next four years, with 1.3 GW identified for drop-down opportunities next year. CWEN.A currently has 4.68 GW in operation across its renewable portfolio and also has 2.47 GW of conventional gas plants in California and Connecticut. These conventional thermal plants mean CWEN.A is not a 100% renewable energy company, but natural gas has been critical for decarbonization from coal to gas switching and will play a part in the energy mix for a long time.

Operating Performance And CAFD Guidance

Clearway Energy Fiscal 2023 Third Quarter Presentation

CWEN.A generated revenue of $371 million during its third quarter, up 9.1% over its year-ago comp and a beat by $5.5 million on consensus estimates. Growth was driven by strong solar availability during the quarter. Solar availability at 101% during the third quarter was ahead of the second and first quarters. Whilst wind availability was ahead of the second quarter, August and September availability was weaker than expected, with cash available for distribution ("CAFD") of $156 million generated during the quarter. CWEN.A is guiding for CAFD in its full-year 2023 to come in between $330 million to $360 million. The low end of this guidance range would be ahead of CAFD generated in 2022 of $326 million.

Clearway Energy Fiscal 2023 Third Quarter Presentation

CWEN.A is also forecasting that CAFD will increase to $395 million in 2024, a growth rate of 14.5% over the midpoint of its 2023 CAFD guidance range. Full-year 2024 CAFD would have been higher at $415 million if not for certain one-time maintenance costs. Critically, CWEN.A is seeking to match dividend growth of around 8% in 2023 with management expressing confidence that they should be able to achieve a dividend per share growth of 7% in 2024.

Interest Rate Cuts

CWEN.A's dividend yield has pulled back after reaching highs in response to the chaos triggered by the collapse of NextEra Energy Partners ( NEP) with a normalization of a historical ~8% dividend yield from when I last covered the ticker. The macroeconomic picture continues to form the core risk for current shareholders, with the recent rally driven by the Fed's unexpected dovish December dot plot, which showed three interest rate cuts for next year of at least 75 basis points. CWEN.A has also since joined the S&P SmallCap 600. The CME FedWatch Tool, which visualizes 30-Day Fed Funds futures pricing data, is pricing in even more cuts through 2024 with expectations now for the Fed funds rate to drop to the range of 3.75% to 4.00% by the end of 2024, roughly 150 basis points of cuts.
CME FedWatch Tool

Whilst CWEN.A has limited interest rate risk with 99% of consolidated debt fixed and with no corporate maturity until 2028, the yieldco has utilized interest rate swaps which will expire over the next few years. The increase in market confidence about rate cuts next year over the last few weeks also represents a risk, as any paring back of expectations in response to near-term FOMC meetings or inflationary shocks would likely lead to a sell-off. CWEN.A is a long-term investment and a play on the growing wave of decarbonization. It's now my largest single renewable energy investment, with the outlook for CAFD and dividend per share growth forming strong backstops for my investment. This is a multi-decade growth sector, and interest rate cuts will further add legs to the yieldco's dividend growth outlook.