The explosion of YieldCo stocks in the solar power industry continues today (Friday) with the 8Point3 IPO (Nasdaq: CAFD).
With a price set at $21 a share, the offering of 20 million shares is expected to raise about $420 million.
8Point3 Energy Partners is an unusual joint venture between two rival solar companies, First Solar Inc. (Nasdaq: FSLR) and SunPower Corp. (Nasdaq: SPWR).
First Solar and SunPower created this joint venture to operate solar projects they've already built while generating fresh capital for new projects.
The odd name is a reference to the time it takes for the Sun's energy to reach the Earth - 8.3 minutes. Likewise, the CAFD ticker symbol is sort of an inside joke. It's an abbreviation for "cash available for distribution," a metric that helps determine the size of the YieldCo dividend.
In fact, cash available for distribution is what drove First Solar and SunPower to team up on this YieldCo.
Neither had enough CAFD to set up a YieldCo on its own. By working together to launch the 8Point3 IPO, both companies can now reap the advantages of a YieldCo. And because 8Point3 will operate as an independent entity, it's safe way for the two competitors to work together.
YieldCos have become a popular way for solar companies to reduce taxes on income from finished projects. In the past two years, more than half a dozen YieldCo stocks have gone public.
But YieldCo stocks aren't just good for the parent companies. They offer advantages for investors as well.
Why Income Investors Love YieldCo Stocks
Most income investors are familiar with master limited partnerships (MLPs) and real estate investment trusts (REITs).
A YieldCo is similar to those vehicles in that it is structured to let profits pass through to investors. The difference to MLPS and REITs is that a YieldCo is taxed as a corporation and uses depreciation and expenses to reduce taxes.
But one trait a YieldCo shares with its sister investments is a high-yield dividend...
A YieldCo dividend is about 6% on average. That's why YieldCo stocks have attracted the attention of income investors.
The parent companies, because they own a portion of the YieldCo stock, also enjoy the dividend income. In the case of 8Point3, First Solar will own 31.1% of the CAFD stock, while SunPower will own 40.7%.
The 8Point3 dividend will start at an annualized yield of 4.2%.
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That's not bad, but YieldCo stocks are known for above-average dividend growth. As new projects are completed, parent companies feed them into their YieldCo. That increases overall revenue and provides more cash for distribution - and higher dividend payouts. And 8Point3 has two parent companies.
8Point3 has forecast an impressive dividend growth rate of 12% to 15% a year for its first three years. By comparison, REITs and MLPs rarely have dividend growth rates above 10%.
Does that mean investors should jump on this IPO? Well, not so fast. There's more to consider.
How to Play the 8Point3 IPO
Keep in mind that we're talking about an IPO. But more importantly, in this case we have two other stocks - FSLR and SPWR - that will benefit from this YieldCo.
So investors need to look at all three as potential investments based on this event.
- 8Point3 IPO: Frankly, CAFD shows strong potential as an investment that will deliver both income and price appreciation. The only caveat here is that as an IPO, CAFD may be too much of a risk to buy right away. Instead, interested investors should wait three to six months for the volatility to settle down.
- SunPower: SPWR got slammed by lower oil prices and bad earnings as a result of moving assets into 8Point3. It's down nearly 19% over the past 12 months. SunPower is a world leader in solar panel efficiency, although that lead has been shrinking. But SPWR has a strong international presence, which will help it take advantage of rising demand for solar in any part of the world. It also made a partnership deal with battery company Stem to pair its solar installations with Stem's energy storage. SPWR is not a bad way to play the 8Point3 IPO. The stock closed at $32.55 Thursday and has a $40.91 one-year price target.
- First Solar: Like SPWR, FSLR got hit by the drop in oil prices and a hit to earnings from the preparation for the YieldCo. As a result, the stock is down 24% over the past 12 months. But First Solar is doing many things well. The company reported that it was virtually sold out for 2015. It's also made a promising alliance with Caterpillar Inc. (NYSE: CAT) to grow its overseas sales. Best of all, First Solar has caught up in the efficiency ratings of its solar panels, which had been lagging. So much progress has been made that FSLR is now close to surpassing the industry average. FSLR closed Thursday at $51.95. It has a one-year price target of $62.77. Both SPWR and FSLR should do well, but FSLR gets the edge as the best way to play the 8Point3 IPO.
Follow me on Twitter @DavidGZeiler.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.