UK-based Atlantica Sustainable Infrastructure (AY) is — as its name suggests– a sustainable infrastructure company, with the bulk of its operations focused on investing and operating renewable energy assets.
The company’s objective is to be a prominent player in the ongoing transition toward a more sustainable world, while generating long-term value for its shareholders, primarily in the form of dividend income.
Since its IPO, Atlantica has been able to sustain growing dividend payouts backed by its predictable cash flows that are supported by multi-year PPA (Power Purchase Agreement) contracts.
In my view, Atlantica should be able to serve conservative, income-oriented investors rather adequately. However, due to lacking any extraordinary total return potential, I am neutral on the stock.
Atlantica’s portfolio features several qualities. The company’s asset base currently includes 39 assets supporting 2,044 MW of aggregate renewable energy installed generation capacity.
Specifically, Atlantica operates 22 renewable energy sources like solar and wind farms (73% of cash flows available for distribution), six transmission and transport projects (11% of CAFD), three efficient natural gas projects (13% of CAFD), and three water projects (3% of CAFD).
The entirety of revenues generated by these assets is contracted under long-term PPAs featuring a weighted average remaining contract life of 15 years. Therefore, the company enjoys rather predictable and secure cash flows.
The company is also well diversified geographically, with 46% of its revenues sourced from North America, 31% from Europe, 15% from South America, and 8% from the rest of the world.
I am also particularly keen on Atlantica’s off-takers, which are quite creditworthy, reducing the company’s counterparty risks. These off-takers include:
- The Kingdom of Spain,
- UTE (Uruguay’s National Administration of Power Plants and Electrical Transmissions),
- The Government of Peru, Sonatrach & ADE (Algeria’s state-owned oil company),
- CNE (National Energy Commission of Chile),
- Enel Generacion Chile,
- and Eskom (publicly traded with robust and transparent financials), amongst other smaller investment-grade off-takers.
Further, more than half of Atlantica’s assets have their rates linked to inflation, a formula based on inflation, or are indexed to a fixed number of rate escalations over time. Hence, the company is somewhat protected from the ongoing elevated inflation levels.
Finally, while operating internationally, more than 90% of Atlantica’s CAFD are received either in USD or are hedged against their local currencies. Hence, the company features limited FX risks as well.
Atlantica’s latest results demonstrated the resilience and stability provided by its assets, with adjusted EBITDA coming in at $824.4 million for Fiscal 2021, 3.6% higher year-over-year.
Accordingly, cash available for distribution rose 12.4% year-over-year to $225.6 million. On a per-share basis, CAFD increased by 3.1% to $2.03 during the year.
The mismatch with the aggregate CAFD and the per-share metric was due to a higher number of shares outstanding issued by the company to fund its investments and acquisitions. Still, with the company achieving growth on a per-share basis, it’s evident that these investments are accretive to the bottom line.
Dividend & Valuation
Due to the security of its cash flows, Atlantica has managed to grow its dividend consistently, sometimes more than once per year. However, all these intra-year increases have generally been by just a cent.
The latest dividend increase was once again by a cent, or 1.1%, to a quarterly rate of $0.44. At an annualized rate of $1.76, the dividend is well covered by the underlying CAFD per share, which came in at $2.03 during Fiscal 2021.
As the company’s CAFD continues to grow through incremental acquisitions and contractually secured rate increases, the company should be able to keep hiking its quarterly dividend by a cent or two over time.
Atlantica’s dividend growth prospects are rather thin, nonetheless. However, with the stock yielding close to 5.1%, conservative income-oriented investors are likely to be more than happy with the regular and gradually growing payouts.
That said, I am rather troubled with the stock’s valuation. Atlantica is trading close to 11.3 times its forward EV/EBITDA, which is a notably richer multiple than its five-year average.
I find it hard that Atlantica’s growth prospects could support a higher multiple. Hence, investors may be facing valuation compression risks, if anything, from the stock’s current price levels.
Wall Street’s Take
Turning to Wall Street, Atlantica Infrastructure has a Hold consensus rating based on four unanimous Hold ratings assigned in the past three months.
At $38.25, the average Atlantica Infrastructure stock projection implies 9.8% upside potential.
Overall, I believe that Atlantica Infrastructure makes for a great vehicle to get exposure to the rapidly growing renewable energy industry with lowered risks.
The company’s well-diversified portfolio should keep generating predictable cash flows for decades to come. Accordingly, investors should keep enjoying rather predictable and well-covered dividends, even if dividend prospects are rather humble.
Still, I find the stock fully valued, and considering that the underlying dividends should comprise the majority of investor returns over the long term, Atlantica lacks the potential to generate extraordinary total returns ahead.
Consequently, while the stock could fit in some conservative, income-oriented portfolios, dividend growth investors are likely to find Atlantica’s investment case somewhat underwhelming.
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