TerraForm Power (NASDAQ: TERP) has been an abysmal performer since its initial public offering more than four years ago, with shares losing 65% of their value over that time frame. Driving that decline was the renewable energy company's now-bankrupt parent, which led it on a buying binge that destroyed value instead of creating it.
However, TerraForm Power is now under the control of a new parent company, Brookfield Asset Management (NYSE: BAM), which has a long history of creating shareholder value. Since taking over, Brookfield has instituted a strategic turnaround plan that's already starting to pay dividends. Because of that, TerraForm is beginning to catch the eye of Wall Street. That's evident after a couple of analysts upgraded the stock in the last month, motivated by their view that the company has a bright future.
Energized by the second quarter
TerraForm Power showed continued progress on its turnaround when it announced second-quarter results in mid-August. That report caught the eye of an analyst at Oppenheimer, who upgraded the company's stock from market perform to outperform while setting a $14 price target, which was nearly 30% above the stock's price at the time.
Several factors drove that bullish view. First, the analyst noted that the company's second-quarter report showed success in executing several "critical" initiatives. For starters, the company closed its acquisition of western European wind and solar company Saeta, which improved its capital structure so that it earned a credit rating upgrade. Further, the deal has opened the door for new opportunities in Western Europe, which the company is working quickly to capture.
In addition to that, TerraForm signed a new long-term contract with GE (NYSE: GE) to improve its wind operations. The company expects that GE will be able to reduce its costs while also enabling it to collect incremental revenue starting early next year, which is well ahead of the two- to three-year time frame it initially set. Those factors increased Oppenheimer's confidence that TerraForm Power can grow its dividend by 5% to 8% per year through 2022.
The risks are fading away
Goldman Sachs, meanwhile, upgraded TerraForm's stock in mid-September from sell to neutral, while setting an $11 price target, which is a bit lower than the current price. However, while the renowned investment bank might not be quite as bullish as Oppenheimer, its upgrade is worth noting since it sees lots to like about the company.
First, the bank noted that the risks surrounding the company are fading. Not only has the return reduction potential for the company's newly acquired Spanish assets subsided, but it completed the sale of new equity to fund that sale, lifting the overhang of uncertainty.
Meanwhile, the company has improved the visibility of its growth prospects. An analyst at the bank noted this by writing, "we see strong visibility to hit growth expectations under the larger platform including Saeta and a host of existing organic opportunities such as cost savings [and] repowering."
The company outlined this upside in its second-quarter presentation, pointing out that it has identified $416 million of potential organic growth investments, including holding the right of first offer to acquire several assets, the ability to buy out minority partners, and the potential to replace older wind turbines with newer and more powerful ones. On top of that, the company could also make third-party acquisitions with the help of Brookfield. Capturing half of the opportunities it has identified could add $28 million in incremental cash flow available for dividends, which is a 22% increase from last year's stand-alone level. That increasing visibility into what can drive growth improves the probability that TerraForm can achieve its dividend expansion plan.
A lower risk high-yield stock
TerraForm Power has come a long way since Brookfield took control last year by quickly putting a turnaround plan into action. Because of that, it was able to start paying a dividend again this year, which currently yields 6.4%. That success is beginning to win over Wall Street analysts, who see even better days ahead as the company starts growing its cash flow and dividend in the coming years. That steadily rising income stream is among the factors that make TerraForm one of the top renewable-energy dividend stocks to buy right now.
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Matthew DiLallo owns shares of Brookfield Asset Management, General Electric, and TerraForm Power. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.