Hannon Armstrong (HASI) is a truly unique company. At first glance, it may appear as a traditional utility company with a diversified portfolio of renewables.
However, since the company only invests in these renewable assets and doesn’t actually operate them, Hannon Armstrong could qualify as an investment company.
Yet, due to its renewable infrastructure assets qualifying as real estate, the company has chosen to qualify as a Real Estate Investment Trust, optimizing its tax structure. This is important since the company pays substantial dividends, thus benefiting shareholders.
On the one hand, the company’s growth prospects remain robust, and the dividend is enticing. On the other, Hannon Armstrong could be modestly overvalued in a rising-rates environment. For this reason, I am neutral on the stock.
A Robust Asset Portfolio
One of Hannon Armstrong’s most attractive traits is its renewable infrastructure portfolio, which is set to keep producing resilient cash flows for decades to come.
Hannon Armstrong’s portfolio is valued at around $3.7 billion and is divided into three market divisions: Its Behind-the-Meter business (46% of assets) focuses on the installation of solar power, electric storage, and other heat and power systems.
The Grid-Connected segment (51% of assets) concerns investments in grid-connected renewable energy projects, including solar and off/on-shore wind projects. Finally, the rest of its portfolio is invested in Sustainable Infrastructure projects involving the use of natural resources.
As of its latest filings, Hannon Armstrong had interests in roughly 320 investments, featuring a weighted average contract life of 18 years and an investment yield of 7.3%. Thus, the company’s revenues are not only incredibly diversified, but due to their long-term, contractual nature, the company enjoys fantastic cash flow visibility.
Over time, Hannon Armstrong’s portfolio should become further diversified. Its investment pipeline currently exceeds $4 billion, which means that its asset base is set to more than double, going forward.
Recent Performance & Outlook
Hannon Armstrong’s latest results illustrated the resilient nature of the company’s asset base, as well its continuous growth amid a solid investment pipeline.
Total revenues rose 12.9% year-over-year to $58.5 million, powered by increased interest income backed by a larger portfolio and a higher average yield. Loftier fee income that was driven by supplementary fee generating opportunities also strengthened results. Consequently, distributable earnings per share came in at $0.52 versus $0.43 in the comparable period last year.
Due to the predictable nature of the company’s cash flows and future pipeline, management reiterated its prior medium-term outlook. Specifically, the company expects to achieve a distributable EPS CAGR between 10% and 13% through 2024. Further, annual dividends are expected to grow at a CAGR between 5% and 8% during this period.
This is quite remarkable since few companies can provide such a lengthy outlook, and even fewer such a narrow one in terms of the expected range of future growth. This greatly increases the predictability of Hannon Armstrong’s investment case.
Dividend & Valuation
Hannon Armstrong’s dividend has been raised for four years in a row. The latest hike this past February was by 7.1% to a quarterly rate of $0.375, which is in line with the company’s dividend growth guidance. Based on the midpoint of management’s distributable EPS guidance as well as the company’s performance in Q1, Hannon Armstrong should achieve distributable EPS close to $2.09 this year, implying a growth of 11.5% from Fiscal 2021.
At the current dividend per share run-rate, this suggests a payout ratio of around 72%. While this ratio could appear a bit elevated, management’s medium-term guidance implies that its distributable EPS is set to grow faster than its dividend per share.
If we are to apply the midpoint of both growth outlooks over the next five years with Fiscal 2021 as the base year, the payout ratio will have fallen to 58% by 2027. Hence, dividend coverage is set to improve, going forward.
Following the stock’s correction year-to-date, the dividend yield has been pushed close to around 4%. This is a great starting yield for investors considering payouts should comfortably grow from here.
However, I wouldn’t say the stock is not pricy at its current levels. Assuming Hannon Armstrong delivers distributable EPS of $2.09 in Fiscal 2022, as mentioned earlier, the P/DEPS ratio would currently stand at nearly 18x.
On the one hand, it makes sense that investors are willing to pay a slight premium for the stock amid a noteworthy yield and an impressive growth outlook. On the other hand, we must not forget that Hannon Armstrong is an investor in these renewable assets.
With interest rates currently on the rise, the company’s investment yields may decline going forward, causing the company to adjust its guidance lower. Nonetheless, even if that’s not the case, increased rates should also warrant a humbler multiple on the stock as the cost of equity increases. Thus, it’s not unlikely for the stock to undergo a valuation multiple compression which could damage shareholders’ total return prospects.
Wall Street’s Take
Turning to Wall Street, Hannon Armstrong has a Strong Buy consensus rating based on four Buys and one Hold assigned in the past three months.
At $63.40, the average Hannon Armstrong price target implies 70.4% upside potential.
Takeaway
Overall, Hannon Armstrong is a great investment vehicle for investors looking for exposure to green infrastructure assets. The company’s diversified renewables portfolio and sizable investment pipeline should allow for high-visibility growth in the coming years, backed by multi-year contracts.
Due to its above-average yield and robust dividend growth prospects, Hannon Armstrong is likely to be an ideal investment for dividend growth investors. Investors should also be cautious of the stock’s valuation, which could pose a risk to total returns in a rising-rate environment, nonetheless.
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