Better Buy: TerraForm Power, Inc. vs. 8point3 Energy Partners

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When yieldcos were first conceived they were supposed to be a safe way for investors to buy into the renewable energy industry. TerraForm Power Inc. (NASDAQ: TERP) was one of the early yieldcos, and under the leadership of sponsor SunEdison, it grew rapidly in both wind and solar.

8point3 Energy Partners (NASDAQ: CAFD) is a newer yieldco, but it's set up differently than most yieldcos before it. The company is sponsored by both First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) and will only own projects developed by those sponsors. This sets up a contrast between TerraForm Power and 8point3 Energy Parters, so which one is best for investors today?

What separates yieldcos

While yieldcos may seem similar on the surface, they're very different in how they operate. The first difference is the relationship with the sponsor. TerraForm Power has struggled by being tied to a bankrupt sponsor and accusations that SunEdison used TerraForm Power as a dumping ground for projects to fund operations. It's possible the yieldco overpaid for assets and boosted its dividend prematurely to prop up SunEdison before the developer failed. 8point3 Energy Partners has two sponsors, which keeps them in check from abusing the yieldco to help operations.

Another big differentiator is capital structure and the cost of debt for the yieldco. A lower cost of debt allows the yieldco to purchase projects for a higher price, while maintaining equity returns, and means more revenue flows to the bottom line and can eventually be paid out in dividends. TerraForm Power hasn't filed quarterly statements since Q3 2015, but back then its term loan interest rate was 5.33%, a rate that's likely risen after SunEdison's bankruptcy. 8point3 Energy Partners' term loan has an interest rate of 2.67% as of the last 10-Q filed with the Securities and Exchange Commission. That's a big advantage to 8point3 Energy Partners.

Yield isn't what it appears

Investors will also want to see strong dividend yields from yieldcos, which is why they exist in the first place. If you look on Yahoo! Finance, it appears that TerraForm Power has a dividend yield edge over 8point3 Energy Parters, 10.1% to 6.7%. But that's highly misleading.

TerraForm Power suspended its dividend this year and it's unknown when the payout will continue. In other words, the stock currently yields 0%.

8point3 Energy Partners, on the other hand, has steadily grown its dividend since inception at a rate of 15% per year. And that growth is what makes clear that 8point3 Energy Partners is a better stock for investors.

Growth favors 8point3 Energy

For yieldcos to grow, they have to be able to buy projects with a return that's higher than their own costs (debt plus dividends). So, lower interest rates on debt and lower dividend yields means a yieldco can buy projects that will eventually add to their dividend long term. And the clear advantage on this growth goes to 8point3 Energy Partners.

There's just too much uncertainty today to judge TerraForm Power's ability to buy projects in the future, even if it eventually breaks free from SunEdison.

As it stands today, there's no doubt that 8point3 Energy Partners is a better buy for investors. That could change if TerraForm Power begins giving investors complete financial information and can start paying a dividend, but that's not a risk yieldco investors should be taking today. It's better to take the safe approach for now.

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Travis Hoium owns shares of 8point3 Energy Partners, First Solar, and SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.