As more dividend-stock investors uncover the distinctive structure and characteristics of Hannon Armstrong (NYSE:HASI), its popularity is on the rise. The company’s ability to deliver predictable dividend growth combined with the stock’s substantial yield is gaining attention and driving interest.
With the stock having dipped by 30% over the past year due to rising interest rates and investors seeking higher yields from yield companies (YieldCos), Hannon Armstrong offers a compelling investment case, in my view. Accordingly, I am bullish on the stock.
What Makes Hannong Armstrong a Unique Renewables Company?
Hannon Armstrong might seem like a typical utility company with a variety of renewable energy projects in its portfolio, but there’s actually much more to it than meets the eye. Rather than operating these projects, the company invests in them, which would technically make it an investment company.
However, the company’s renewable assets qualify as real estate, so Hannon Armstrong has chosen to classify itself as a Real Estate Investment Trust (REIT) to optimize its tax benefits. This is significant because the company pays generous dividends, making it a popular choice for investors seeking income.
A Quality Portfolio of Renewables Backed by an Even Larger Pipeline
Hannon Armstrong features a high-quality portfolio of renewables, whose growth is being backed by an even larger pipeline of potential investment projects that management has identified.
Hannon Armstrong’s renewable energy portfolio is worth about $4.3 billion, with the company splitting its investments into three categories: Behind-the-Meter (47% of assets), Grid-Connected (39% of assets), and Sustainable Infrastructure (the remaining 4% of the portfolio).
Behind-the-Meter is all about solar power, electric storage, and other heat and power systems, while Grid-Connected focuses on renewable energy projects that are connected to the grid, like solar and wind farms. Lastly, Sustainable Infrastructure projects use natural resources in innovative ways.
What Makes Hannon Armstrong’s Renewables Portfolio Special?
Through years of cherry-picking high-quality projects, Hannon Armstrong now has interests in more than 340 investments, featuring an impressive weighted average contract life of 17 years and an investment yield of 7.5%.
Besides the portfolio being highly diversified among different categories and projects, it also enjoys great cash-flow visibility. As mentioned earlier, however, the company doesn’t own these assets directly but rather holds economic interests in the form of preferred equity, debt, etc.
With these projects usually attached to long-term PPAs (Power Purchase Agreements) with energy off-takers, generating stable cash flows which then distribute to Hannon Armstrong, the company records predictable cash flows.
Hannon Armstrong’s Portfolio Growth Prospects
Moving forward, Hannon Armstrong is planning to expand and diversify its already large portfolio. By doing so, the company hopes to achieve economies of scale, which will set it up for even greater success. Management’s identified investment pipeline is already bursting at the seams with over $4.5 billion worth of potential investments. If all goes according to plan, Hannon Armstrong’s asset base could more than double!
Resilient Results with High Forward Visibility
As I mentioned earlier, Hannon Armstrong’s portfolio is able to generate very resilient results. The underlying PPAs linked to the projects and the company’s well-structured economic interests help to ensure consistently strong results. And its most recent results prove it — Hannon Armstrong achieved another year of record numbers!
In FY2022, total revenues rose 12.4% year-over-year to $239.7 million, driven by higher interest income backed by a larger portfolio and a stronger average yield. Further, distributable earnings per share came in at $2.08, up 11% compared to last year, despite the additional shares Hannong Armstrong issued to fund some of its latest investments.
Management even reaffirmed its multi-year performance outlook, which is a clear sign that the company has high cash-flow visibility. Specifically, Hannon Armstrong is projecting a distributable EPS CAGR between 10% and 13% through 2024. And that’s not all – annual dividends are also expected to grow at a CAGR between 5% and 8% during this period, which provides great visibility into the company’s future capital returns as well.
Is Hannon Armstrong Worth Investing in for Its Dividend?
Like other REITs and investment firms, Hannon Armstrong’s main appeal to investors is its attractive dividend, which currently provides a significant yield of 5%.
One side of the argument would be that given a high interest-rates environment, investors should demand an even higher dividend yield from a YieldCo. However, given that Hannon Armstrong’s dividend is projected to keep growing at a good pace, in the mid-to-high single digits per annum moving forward, I find the stock a compelling pick for those looking to generate a substantial and growing income.
The most recent dividend increase of 5.3% a couple of weeks ago was in line with management’s guidance and marked Hannon Armstrong’s fifth consecutive annual dividend increase.
Is HASI Stock a Buy, According to Analysts?
Turning to Wall Street, Hannon Armstrong has a Moderate Buy consensus rating based on four Buys and two Holds assigned in the past three months. At $42.67, the average Hannon Armstrong stock price target implies 34% upside potential.
The Takeaway
Hannon Armstrong’s unique approach to renewable energy investment as a Real Estate Investment Trust has resulted in a promising growth outlook, supported by an impressive pipeline of potential investments.
With a resilient financial performance and projected dividend growth, the company’s shares offer a compelling proposition for income-oriented investors seeking exposure to the expanding renewable energy sector. Hannon Armstrong’s innovative business model and high forward visibility position it well for continued success as well.
