Is Clearway Energy Stock A Buy?

Clearway Energy (CWEN), formerly known as NRG Yield, Incorporated, is in the business of acquisition, ownership, and operation of renewable energy generation.

With over 4.7 combined gigawatts of power from wind and solar, as well as other renewable sources, Clearway Energy is one of the largest companies of its kind in the United States.

The company’s footprint and pipeline includes both wind- and solar-powered assets at utility scale. Clearway also operates several community-based solar projects throughout the nation. Its portfolio includes several projects focused on the wide distribution of solar.

Is Clearway Energy Stock A Buy?

Clearway’s portfolio is highly diversified with assets ranging from 100% renewables to natural gas.

It is also the operator of one of the largest energy and combined heat & power, or CHP, portfolios in the nation. It’s this portfolio of strong assets that provides the company with a steady flow of cash. This cash flow is backed by contracts with utility and commercial companies – long-term and fixed-rate.

From these assets and contracts, Clearway expects 2020 revenue generation of around $310 million, roughly $1.56/share. This is 22% more than 2019’s revenue and is due to the company’s most recent asset and contract acquisitions.

Clearway’s dividend of $0.21/share/quarter creates a payout ratio of just below 55% – a conservative figure that allows the company to retain a majority of its cash flow for future growth ideals. Leverage metrics are well within the company’s target range, thanks to a sound financial perspective and balance sheet.

The company plans to acquire three projects in 2021 that are expected to raise Clearway’s annual cash flow to $340 million, or $1.70/share.

These acquisitions are expected to boost the company’s stock by 9%. It’s these acquisitions that will diversify the company portfolio and pull its cash flow from Pacific Gas & Electric – putting the company payout on firmer ground.

Risks of Buying Clearway Energy Stock

Clearway is still a “baby” compared to other energy giants. The company’s cash flow for 2020 has risen over 20% – but this is due to savvy acquisitions and other investments.

It also acquired three wind farms, as mentioned above. These transactions alone will provide an added injection of 10% more cash flow as soon as the deals are completed early in 2021.

But just because Clearway is new at the game doesn’t necessarily mean the stock is inherently risky. Clearway has several strategic partnerships – renewable energy developers and even a private equity fund. These alliances should introduce even more opportunities for additional acquisitions and investments in the future.

Still, a hurdle the energy company might face is access to additional financing. If Clearway scales that with no problems, this company’s staying power could lead to significant dividend increases in the future.

Can Clearway Energy Competitors Win?

Of Clearway Energy’s competition, DTE Energy (DTE) and Edison International (EIX) are its closest rivals.

Clearway vs. DTE

Let’s take a look at these two energy companies’ dividends for comparison.

Clearway:

• Annual dividend – $1.25/share, or -1,250.0% of earnings
• Dividend yield – 4.1%

DTE:

• Annual dividend – $4.05/share, or 64.3% of earnings
• Dividend yield–3.4%

Both energy companies have hearty ratios that future earnings won’t have any trouble covering. Each company has also raised dividends for only one year consecutively. Looked at this way, Clearway is a much better dividend stock.

Clearway vs. Edison International

For this comparison, we’ll visit valuation, earnings, volatility, profitability, and dividends.

• Higher revenue & earnings: Edison
• Trades at lower price-to-earnings ratio: Clearway

Of the two stocks, Clearway is more affordable.

• Edison: 54% less volatility than S&P 500
• Clearway: 24% less volatility than S&P 500

Clearway may be a bit riskier than Edison, but what about profitability?

Net margins

• Clearway: 4.56%
• Edison: 9.42%

Return on equity

• Clearway: 2.42%
• Edison: 9.8%

Return on assets

• Clearway: 0.56%
• Edison: 2.35%

Edison might be the winner here, too. So, what about dividends?

Clearway:

• Annual dividend – $1.25/share, or -1,250.0% of earnings
• Dividend yield – 4.1%

Edison:

• Annual dividend: $2.55/share
• Dividend yield: 4.5%

Much like Clearway vs DTE, in Clearway vs Edison, both companies have healthy payout ratios that future earnings won’t have any trouble covering.

Both companies in this matchup have also raised dividends for only one year consecutively. Looking at the two companies like this, Edison comes out on top.

Is Clearway Energy Stock A Buy: The Bottom Line

Clearway isn’t your average energy stock and they certainly have room to grow even brighter – remember the company dividends? Pretty spectacular.

With that said, energy stocks aren’t known for having great dividend track records. Lots of energy companies, Clearway included, pay yields that are above the average mark. But that kind of dividend payout isn’t always sustainable.

In fact, Clearway Energy has significantly reduced dividend payouts in the past due to financial strain. Whether that must occur again remains to be seen.

From a discounted cash flow perspective, CWEN share price has a fair market value of $22.86. Above that price, Clearway would be overvalued. 

For investors looking to hold long-term, an attractive entry point would be signaled with a share price level about 20% below the CWEN intrinsic value. That’s just a rule of thumb based on Warren Buffett’s margin of safety approach to buying shares that are trading below fair value.

For passive investors striving for a dividend, snapping up Clearway shares now offers a path to what should be reliable dividend income.

For now, Clearway Energy is definitely a stock to watch if you enjoy the energy sector. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.