If you are looking for passive income but think that renewable energy companies don't fit the bill, you are mistaken. Utilities focused on renewable energy offer a great way to generate regular dividend income. Among them, Atlantica Sustainable Infrastructure (AY) is a top option that offers an alluring yield and attractive long-term growth prospects.
A huge and diversified asset portfolio
Atlantica Sustainable Infrastructure owns over 2 gigawatts of renewable electricity generation assets, roughly 72% of which are solar. Renewable power generation is expected to contribute around 70% of the company's cash available for distribution (CAFD) from 2022 to 2026.
Image source: Atlantica Sustainable Infrastructure.
Atlantica also generates power using natural gas. The company expects its efficient natural gas and heat segment to contribute 15% of its CAFD from 2022 to 2026. Transmission lines are expected to contribute 12%, and its water desalination assets are expected to contribute 3%.
The biggest positives for Atlantica Sustainable Infrastructure as an investment are its stable and predictable long-term cash flows. At the end of 2021, the weighted average remaining term of agreements for the company's assets was 15 years. All of its revenue comes from contracted or regulated assets.
The company generally invests in assets with proven technologies in which it has considerable experience. Its assets are also geographically diversified, with 46% of its CAFD coming from North America, 31% from Europe, and 15% from South America. All the above factors contribute to the relative stability of Atlantica's cash flows.
Cash flows are protected from rising inflation and interest rates
Rising interest rates are impacting the stock prices of companies in capital-intensive businesses. But the interest rates on 93% of Atlantica Sustainable Infrastructure's project debt are either fixed or hedged.
Image source: Atlantica Sustainable Infrastructure.
That means those project costs will not escalate due to rising interest rates. The company's project debt is self-amortizing progressively before the end of the contracted life. In the next five years, the project debt is scheduled to reduce by $2 billion from $5 billion at the end of 2021. Notably, Atlantica Sustainable's future spending plans will still get impacted by the higher interest rates. As for the corporate debt, the average maturity is 4.9 years, with no major debt maturing before 2025.
Similarly, the company has escalation factors included in its contracts to protect it from inflation. Around 40% of its CAFD is backed by contracts that are indexed to inflation, and another 12% are indexed to a fixed number. Overall, Atlantica has a decent level of protection from rising interest rates and inflation.
Long growth runway
Renewable energy is expected to account for most of the new investments in the power sector in the U.S. and several other markets in the coming years. Atlantica Sustainable Infrastructure should benefit from this.
Management is targeting CAFD per share growth of 5% to 8% through 2025. Atlantica expects its over $300 million annual growth investments to drive the CAFD growth. The company believes that its selection criteria is conservative, which means it'll find investable projects, despite higher rates. Additionally, higher rates may give Atlantica opportunities to pick up projects that its smaller, more aggressive peers may now find challenging to develop.
Overall, Atlantica Sustainable Infrastructure's addressable market is large and growing. Its diversified assets and long-term contracts help it generate stable cash flows. In short, Atlantica Sustainable Infrastructure is a top renewables stock that can generate passive income for shareholders in the decades to come.
