After U.S. election, investors are turning their attention back to the Federal Reserve. In the second half of 2024, the Fed has already cut the federal funds rate by 75 basis points, and it could cut by another 0.25% next month.
With multiple rate cuts on the horizon, investors may consider increasing their exposure to capital-intensive companies in sectors such as energy and utilities. Current valuations are attractive after higher interest rates caused several debt-heavy companies to underperform over the past three years.
Take Brookfield Renewable Partners ( TSX:BEP.UN ) as an example, the company currently has a market capitalisation of $12.8 billion and a share price down 44% from its all-time high. As a dividend stock that is expected to benefit from the low interest rate environment, now could be a good time to buy Brookfield Renewable Partners at a lower price.
Brookfield Renewable owns renewable energy generation facilities in the Americas, Europe and Asia, generating electricity through hydro, wind, solar, distributed generation, pumped storage, cogeneration and biomass. Its dividend distribution has grown at a compound annual growth rate of 6% over the past 23 years, with a current forward dividend yield of 5.6%.
It is worth pointing out that the company is also benefiting from the artificial intelligence (AI) megatrend. Management expects a surge in energy demand due to the spread of digitisation and AI.
Global data centre demand is expected to grow 15-fold between 2022 and 2030, with data centres accounting for 10% of global power consumption by 2030, compared to just 2% at this stage. Brookfield has ten major data centres in global market, which makes it the largest clean power partner of choice for buyers.
A key contributor to the company’s share price underperformance has been expanding interest expenses. Brookfield’s interest expense totalled $1.94 billion over the past 12 months, up from $1.62 billion in 2023 and $1.22 billion in 2022. The company ended the third quarter with $25.5 billion in long-term debt, up from $19.7 billion in 2021 and $16.16 billion in 2019.
However, Brookfield continues to have a strong balance sheet, capital recovery initiatives and diversified funding sources, with current liquidity totalling $4.4bn and more than $10bn invested in capital expenditure this year, which will drive future cash flow and earnings.
The company’s most recent quarterly FFO reached $278 million, or $0.42 per share, up 11 per cent year-on-year, despite a challenging macro environment. Considering the quarterly dividend of $0.355 per share, Brookfield’s payout ratio of 84% is high.
Because of this, the lower interest rate environment will help the company reduce interest expense and expand distributable cash flow per share, helping to achieve its goal of better rewarding shareholders over a longer period of time.
