Source: Brookfield Renewable Energy Partners

Market crashes are the best time to buy high-quality dividend growth stocks at bargain prices. Recently Brookfield Renewable Energy Partners (BEP -4.15%), which until recently was handedly beating the total returns of the S&P 500, has seen its unit price collapse 26% since its March 2015 highs.

BEP Total Return Price Chart
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Find out if Wall Street's pessimism about Brookfield Renewable Energy represents a great long-term buying opportunity or if the market is signaling major problems ahead for the hydroelectric and wind yieldco.

Valuation looks extremely attractive...

Utility  Yield  5 Year Average Yield  Long-Term Projected CAGR Payout Growth 
Brookfield Renewable Energy Partners 6.7% 4.6% 5%-9%
Average Independent Power Producer 4.4% NA NA 

Sources: Yahoo Finance, Morningstar, Management Guidance

While Brookfield Renewable Energy Partners may initially undervalued, both relative to its peers, its historical yield, and its impressive long-term payout growth potential there is a major problem with this yieldco.

The third and most important aspect of a payout profile, the sustainability of the distribution, has a troubling track record that causes me to doubt management's rosy payout growth guidance.

...BUT rising yield is due to decaying payout profile quality

Metric  2012  2013  2014  2015 
Q1-Q3 AFFO/Unit $1.76 $3.12  $1.46  $1.21 
Q1-Q3 Distributions $1.00 $1.09  $1.16  $1.25 
Q1-Q3 AFFO/Unit Payout Ratio 57% 35%  70%  103% 
Average Revenue per MWH $83 $77  $80  $72 

Sources: Yahoo Finance, Earnings presentations.

Brookfield Renewable Energy Partners has a policy of paying out 70% of funds from operations or FFO. While that makes the current distribution seem highly sustainable (as does the fact that 92% of its cash flows are protected by inflation adjusted contracts with an average remaining length of 17 years) in fact that metric fails to take into account the maintenance costs needed to keep its dams and wind projects functioning.

Adjusted funds from operations or AFFO (which factors in maintenance costs) is what investors need to keep an eye on and as you can see from this table, in the first three quarters of 2015 the yieldco's AFFO payout ratio was unsustainably high.

This was primarily due to two factors. First hydroelectric dams and wind farm power generation can be highly variable. Management projects cash flows based on 30 and 10 year historical averages for hydro and wind output, respectively.

In recent quarters Brookfield Renewable Energy's wind farms have generated below historical average power, and its Canadian and Latin American dams continue to under produce due to historically low rainfall, and an ongoing drought, respectively.

When combined with customer renegotiations for expiring contracts, which is resulting in declining average revenue per MWH, 2015's Q1-Q3 AFFO/Unit declined by 17%.

This should potentially worry investors because between 2015 and 2019 10% of Brookfield Renewable Energy's contracts are up for renegotiation.

Given that Q3 2015's average revenue per MWH declined to just $68, its plain that the recent downward cost customers are willing to pay for the yieldco's power might result in continued pressure on Brookfield Renewable Energy's AFFO/unit in the years to come.

Potentially rising capital costs might decrease profitability of future investments

Metric  Brookfield Renewable Energy Partners 
Debt  $7.6 billion
Debt/EBITDA (Leverage Ratio) 6.6
Average Interest Rate 5.7%
WACC 4.37%
TTM ROIC -1.87%

Sources: Morningstar, Gurufocus

Given both the variable nature of hydroelectric and wind power, as well as the long-term trend in declining electricity prices, the only way for management to hit its long-term respective 5%-9% payout and 12%-15% unit holder total return targets is to keep growing and diversifying its asset base.

This would hopefully grow AFFO fast enough to secure the current payout and allow its continued growth, which usually comes from a combination of organic growth investment and acquisitions of new dams and wind farms. Such deals are put together by the yieldco's sponsor and general partner Brookfield Asset Management (NYSE: BAM).

In fact Brookfield Asset Management recently put together a $2.2 billion deal to acquire 57.6% of Isagen from the Columbian government. Isagen owns 6.8 GW of hydro electric dams, either currently producing power, or scheduled to be completed in the future. Brookfield Renewable Energy will pay $517 million for a 25% stake in Isagen, which will consume just over half of its $1 billion in current liquidity.

However, there are two major risks to Brookfield Renewable Energy's growth opportunities. First the yieldco's high leverage ratio means that it is likely to face rising debt costs, especially in a rising interest rate environment. This will likely raise its weighted average cost of capital or WACC.

Second, its trailing 12 month return on invested capital or ROIC, isn't just below its WACC, but actually negative indicating that as it grows the yieldco will actually destroy investor value.

2015's Q3 ROIC came in at a much better 12.93% however I'd have to see a few more quarter's of such high profitability before I felt comfortable investing.

Bottom line:
While I don't believe that Brookfield Renewable Energy Partners' payout is in any immediate danger of being cut, the risks facing the yieldco do call management's optimistic payout growth and total return guidance into question.

If you already own units then I wouldn't necessarily recommend selling. However, I would refraining from adding or opening a position until management is able to prove it can do two key things: generate sufficient AFFO/unit to cover the current distribution, and raise its TTM ROIC to above its WACC, thus ensuring its future investments are accretive to AFFO/unit and improve both the payout sustainability and growth prospects.