The Worst Pattern of Mistake Energy Investors Can Make Right Now
After a few difficult years, the shares of renewable energy company Pattern Energy (PEGI) rebounded dramatically in 2019. Shares of the company are up 42% so far this year, including a spike of more than 12% in the past month on news it reported. received redemption interest.
This rebound likely has shareholders wondering if they should do anything. Some might be considering cashing out, while others are probably considering increasing their position. However, acting in response to a potential takeover is the worst thing Pattern Energy investors can do right now. Here’s why.
The risk of selling too soon
With Pattern Energy shares rising this year, some investors are likely tempted to cash in and lock in those gains. However, that would be tantamount to giving up all the growth potential of the company, which could be substantial. For starters, the company could accept a takeover offer at a higher price than its current price. This offer could be a cash transaction, an all-stock merger, or a combination of both. High Efficiency Renewable Energy Company Power of TerraForm (TERP), for example, reportedly launched a merger proposal. A combination of these two renewable energy companies could create a lot of shareholder value as they benefit from increased scale, which should drive down costs.
Even if a merger offer never materializes, there are plenty of reasons to be optimistic about Pattern Energy’s future. The company is currently in the middle of a two-year strategy that is expected to grow its cash flow per share at an annual rate of 10%. This plan would improve its dividend payout ratio from a worrying 99% last year to a more comfortable 80% by the end of 2020. This would improve the long-term sustainability of the dividend by 6.4 % of Pattern, that it should eventually be able to start growing again.
It should have plenty of opportunities to expand its portfolio and its long-term cash flow. It is because the energy industry needs invest billions of dollars in the transition from fossil fuels to renewable energies. Add those growth prospects to Pattern’s high-yield dividend, and it could generate market-beating total returns in years to come as a stand-alone entity. Investors who sell now would miss out on all that upside potential.
The potential pitfalls of buying more
Another decision Pattern Energy investors might be tempted to make is to buy more shares in hopes of increasing their short-term yield. This decision could also have major consequences.
On the one hand, an acceptable takeover offer may not materialize. Although the company has apparently attracted the interest of several suitors, this does not mean that they are ready to pay a higher price. The parent company of TerraForm Power, Brookfield Asset Management, for example, is a reputable value investor, so he probably wouldn’t pay a huge premium for an acquisition. Since Pattern’s shares are already up sharply this year, he may not even get an offer. If he fails to reach an agreement, the shares could then return some of their recent gains.
There is also a risk that the company will not achieve its growth objectives if it remains independent. This is because she needs to make a few more acquisitions to empower her to fulfill her two-year plan. While he has a large pipeline of identified targets thanks to its investment in a renewable energy development company, it does not have all the financing in sight. Another concern is the apparent weakening of global market conditions, due to recession fears, which could hamper Pattern’s funding initiatives.
There’s nothing wrong with doing nothing
When a stock soars on reports that it has generated interest in a takeover, investors often feel the need to react. However, taking action in this situation could result in the wrong decision being made.
That’s why I think the best thing today’s investors can do is absolutely nothing. Let the dust settle and decide once there is more information. Although this may cost short-term gains, investors will avoid making a hasty decision that they may regret later.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.