TerraForm Power Buyout Complete -- Here’s What the Future Looks Like

Brookfield Asset Management's (NYSE: BAM) buyout of a controlling interest in TerraForm Power Inc (NASDAQ: TERP) is complete, and we now have a better idea of what the company, and its stock, will look like long-term. TerraForm Power won't be the high-growth yieldco SunEdison originally intended it to be, and will instead be a much more conservative company. For better or worse, that's what investors are getting.

The new TerraForm Power

The two things investors need to understand about a yieldco is how much of cash available for distribution (CAFD) is actually paid out to investors and how quickly management expects to grow. A high payout ratio (90% or more) can mean higher risk because management won't be paying down debt or growing organically. A high growth rate (over 12%) means management is relying on issuing stock to fund acquisitions, something TerraForm Power relied on heavily when SunEdison ran it.

Brookfield's approach is to build a conservative company, something it has done with Brookfield Renewable Partners (NYSE: BEP), which aims to grow its dividend 5% to 9% through organic growth. And it appears to want to do something similar with TerraForm Power.

TerraForm Power now wants to distribute 80% to 85% of CAFD and grow its dividend 5% to 8% annually. That's much more conservative than the 12% to 15% dividend growth targeted by yieldcos like 8point3 Energy Partners (NASDAQ: CAFD) and NextEra Energy Partners (NYSE: NEP). TerraForm Power will be able to grow organically if it chooses to, or use its stock to buy projects advantageously.

Brookfield is invested in TerraForm Power's growth

To achieve growth, TerraForm Power needs to have renewable energy projects it can buy to grow its cash flows. Brookfield is providing a 3,500 MW pipeline of projects that TerraForm Power will have the right of the first offer to. It's also providing $500 million in acquisition funding.

Together, these support measures should keep TerraForm Power's dividend growing for the next few years. And even a few years of stability is welcome news for shareholders.

What investors are getting with TerraForm Power

In 2018, TerraForm Power is now targeting a $0.72 per share dividend, implying that the stock yields 5.6% as of Tuesday's closing price. That compares to 8point3 Energy Partners' yield of 6.9%, Brookfield Renewable Partners' yield of 5.4%, and NextEra Energy Partners' 3.6% yield. One difference between the three is that NextEra Energy Partners expects to grow its dividend 12% to 15% over the next five years, Brookfield Renewable Partners' dividend aims to grow 5% to 8%, and 8point3 Energy Partners likely won't be able to grow its dividend after 2017. As it stands now, TerraForm Power is in the middle of the yieldco pack in yield and on the low end for growth.

Stability and a steadily growing dividend is what yieldco investors are looking for, and they now think that's what they're getting in TerraForm Power.

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Travis Hoium owns shares of 8point3 Energy Partners and NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.