Yieldcos Reboot

US yieldcos have been around as an asset class for slightly less than five years. To date, the investment track record is a mixed bag. But the group is now getting a reboot that promises to match robust capital gains to already lofty yields.

The key is sponsorship. Or, put another way, there have never been any irredeemably bad yieldcos, only negligent parents who failed to raise them right.

Take the sector’s biggest success story to date, NextEra Energy Partners LP (NYSE: NEP). The yieldco has produced 116 percent dividend growth and a total return of over 70 percent since its June 2014 initial public offering, largely thanks to parent NextEra Energy’s (NYSE: NEE) unshakeable financial support. The parent even cut its incentive distribution rights to reduce the yieldco’s cost of capital.

That’s a stark contrast with the industry’s most challenging story to date: TerraForm Power (NSDQ: TERP) and TerraForm Global (NSDQ: GLBL). Both yieldcos were forced to eliminate dividends for more than two years when parent SunEdison filed for bankruptcy, entangling them in a web of accounting and legal disputes.

Yieldcos today are out of favor, largely because these failures are still fresh in investors’ minds. Elevated short interest is one sign of skepticism that the business model is sustainable. The industry discount is another: Top-performer NextEra Energy Partners yields more than twice the S&P 500. Its price-to-cash flow multiple of 4.96 is barely one-third of the S&P 500’s 14.3 times.