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More Green from Green

September 10, 2020

It’s not easy bein’ green. But green’s the color of spring. And green can be cool and friendly like. And green can be big like a mountain or important like a river or tall like a tree. I’m green and it’ll do fine. It’s beautiful and I think it’s what I want to be.

Those memorable lyrics were made famous by the very green Kermit the Frog. And when it comes to green, I’m fully onboard with more green cash in growth and income for your portfolio.

Environmental, social & governance (ESG) investing was a feel-good sort of investing style for many years. But no more. Now, it’s one of the strongest performing segments in the stock and bond markets.

S&P ESG & S&P 500 Indexes Total Return—Source: Bloomberg Finance, L.P.

S&P tracks its collection of 505 stocks inside the S&P 500 Index as well as its ESG Index. Year to date, the ESG Index is generating significantly greater gains and dividend income for a greater return than the hallowed S&P 500.

ESG Corporate, General Corporate & US Aggregate Bond Indexes Total Return—Source: Bloomberg Finance, L.P. & Barclays

The sharp bond guys over at Bloomberg & Barclays also have their ESG Bond Index. And again, this segment of the US bond market is outperforming the overall US Aggregate Bond Market Index as well as the US Corporate Bond Index.

Now, this may come down to just better corporate management or products and services that are ESG compliant. But I would say that what’s driving the ESG markets comes down to greater demand by institutional investors that are following their clients’ appetites for ESG investments.

One of my favorite companies inside the model portfolios of my Profitable Investing advisory is Hannon Armstrong Sustainable Infrastructure Capital (HASI). It’s a great ESG investment for growth and income.

It provides financing for green energy projects. Since these projects are all in some way based on land (even if off-shore sea bottoms), it came up with the bright idea to incorporate as a real estate investment trust (REIT).

That enables it to avoid corporate income taxes and to pay dividends that thanks to the Tax Cuts & Jobs Act of 2017 (TCJA) come with a 20% tax deduction for individual investors.

Hannon Armstrong (HASI) Total Return—Source: Bloomberg Finance, L.P.

I added the stock to the Profitable Investing portfolios late last year and since then the stock has returned 34.5%. That’s 5.1 times the return of the S&P 500 for the same period. And it’s still a value. The stock is only 2.62 times its intrinsic (book) value, which is just above the average of the Bloomberg US REIT Index.

Revenue over the trailing five years has climbed on average by 28% on a compound annual growth rate (CAGR) basis. And as a green energy financial, it shows that green makes for more green as it runs at a net interest margin (NIM)—the difference between funding and earned interest—at a whopping 17.7%.

That’s way above traditional financials. And it runs lean on cost with an efficiency ratio—the percentage cost of each dollar of revenue—of 56.2%.

The dividend yields a tax-advantaged 3.3%, which is multiples above the average of the S&P 500 and is up in distribution on average by 6.2% annually over the past five years.

HASI has been successfully issuing green bonds, which are strongly in demand, including the recent 3.75% due 09/15/30 that currently yields 3.64% (ISIN # USU2467RAD18) and provides a yield spread advantage of 292.8 basis points (bps, 2.93%) over the equivalent US Treasury bond.

The company operates with several federal, state and local credit guarantees for its financed projects as well as capitalizes on the tax credits and incentives (C&I) that its underlying developers and operators obtain for their projects financed by Hannon Armstrong.

The combination of government support provides an additional level of credit certainty for investors.

I was recently introduced to Laurence Sotsky, the CEO of Incentify, a company that works for businesses to find C&I. He is well-aware of Hannon Armstrong and observed:

“I applaud Hannon Armstrong’s green bonds, and sustainable investing as a whole as they present an innovative model for addressing major issues such as climate change within the bounds of capitalism. By utilizing investors to bridge corporate P&L gaps such that projects get green lit is a powerful model…but not a unique one.

C&I accomplish the very same thing but instead of using private investors to bridge corporate P&L gaps, it’s the government that steps up. Likewise the results for the renewable energy and green worlds have been huge: Tesla depends on C&I to the tune of 8% of total revenue in 2019 just as the entire solar industry was essentially created through Obama era C&I packages.

It is my mission to make sure that innovative macroeconomic policy like green bonds and C&I become celebrated in popular culture. All too often, counterproductive misinformation falsely accusing C&I of being corporate welfare dominates the news cycle. Welfare requires recipients to maintain a certain level of need whereas C&I requires awardees to maintain a certain level of achievement.

The reality is that capitalism isn’t going anywhere…nor should it. We need to work within its confines to address the big issues facing humanity. Principal approaches under that header are sustainable investing and C&I. So, congratulations to Hannon Armstrong on this $350M as well as the greater $6B they have invested overall. I hope to see even more in the future.”

For more green and for my latest buy-under price for Hannon Armstrong, sign up to become a Profitable Investing subscriber today.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life