In May, the Global X YieldCo Index ETF (NasdaqGM: YLCO) came to market as an avenue for helping investors access the burgeoning yieldcos asset class.
“YieldCos are formed when energy companies spin off fully developed assets, such as wind and solar farms, with long term contracts and an objective of returning cash flows to shareholders. Market capitalization for the YieldCo industry currently stands at $39 billion. With 11 announced IPOs in the pipeline, it has become an increasingly popular vehicle for energy firms,” according to a statement issued by Global X.
YLCO, which tracks the Indxx Global YieldCo Index, is home to 20 stocks with the ETF’s top 10 holdings combining for nearly 65.7% of the fund’s weight. Some of YLCO’s largest holdings include TerraForm Power (NasdaqGS: TERP), Brookfield Renewable Energy Partners (NYSE: BEP), SuneEdison (NasdaqGS: SUNE) and First Solar (NasdaqGS: FSLR). [Solar ETF Lessons]
“By design, YieldCos have significantly lower risk profiles than their parent companies, as they typically contain only stable energy producing assets with predictable cash flows, and are not involved in the riskier business of bringing new projects online. Additionally, their primary focus is on distributing available cash flows to shareholders, rather than reinvesting in new technologies or building new projects,” according to Global X.
However, at least one analyst sees risks to yieldco dividend growth.
“Yieldco renewable portfolios are not sensitive to commodity pricing and will generate stable cash flows, which should allow most companies to meet their growth targets. However, we believe that some management teams may ultimately cut dividend growth targets despite having substantial liquidity. Since equity markets clearly are not rewarding, or not believing in the sustainability of guided dividend growth, retaining higher levels of cash and utilizing it for attractive acquisitions at the bottom of the market may ultimately prove to be a better strategy,” said Citigroup analyst Sophi Karp in a note posted by Amey Stone of Barron’s.
As for as YLCO goes, Karp lowered her price target on Abengoa Yield (NYSE: ABY), one YLCO’s top 10 holdings. However, the analyst kept bullish views on three YLCO holdings that combine for about 12% of the ETF’s weight.
Global X YieldCo Index ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.