With the rise in ESG investing and a growing public awareness of environmental issues, the financial community, investors and corporations themselves have moved more quickly than government to embrace the renewable energy sector. Here, seven investment experts and contributors to MoneyShow.com highlight their favorite ideas among companies making advances in the renewable energy space.
Xcel (XEL) is a Minnesota-based utility giant with a footprint that spans eight states across the Southwest and Upper Midwest. The utility is outperforming its peers in large part because investors like its move into renewable energy.
In 2018, Xcel became the first major multi-state U.S. utility to announce plans to reduce its carbon emissions to zero. It seeks to reduce carbon emissions 80% by 2030 and 100% by 2050. Xcel intends to achieve its goals by adding more renewable energy and retiring fossil fuel generators, while continuing the operation of its nuclear power plants.
A core strategy for Xcel is to replace coal-fired power with wind power. According to the company, this will drop the generation cost from $22-$23/megawatt-hour (MWh) to less than $20/MWh. To achieve this, Xcel is making the largest multi-state wind investment in the nation.
Those are appealing aspirations for many investors, but how does this translate to Xcel’s finances? Over the past five years, Xcel’s share price has grown at an average annual rate of 12.6%.
That outperformed the utility industry by 5.7% per year, and more than doubled the return of the S&P 500. Net income grew by 6.1% per year, and the annual dividend grew by 35%.
Looking ahead, Xcel is targeting earnings growth of 5%-7%, a dividend yield of around 2.7% at a payout ratio of 60%-70%, and an overall shareholder return of 8%-10% per year.
My favorite way to play the renewable energy trend is Hannon Armstrong Sustainable Infrastructure Capital (HASI). The stock gives us a fantastic combination of huge growth potential plus an established dividend.
Hannon Armstrong is not on the radar of most investors. Officially classified as a “specialty” REIT, HASI is a bit of a hybrid between a bank and a green energy company. At its core, it’s a financing company. It invests in projects and services focused on energy efficiency, renewable energy, and other sustainable infrastructure markets.
The company completed its first renewable energy financing almost three decades ago. And since going public in 2013, it’s raised more than $8 billion to invest in assets with environmental benefits.
The company takes a flexible approach to its investments, which range from traditional forms like equity and debt to joint ventures and land ownership deals. Hannon Armstrong focuses exclusively on projects involved in energy efficiency, renewable energy, and sustainable infrastructure. In other words, it only invests in things that are growing… and good for the environment.
Like any REIT, HASI is legally required to distribute at least 90% of its taxable income to shareholders as dividends. Over the past six years, the quarterly dividend grew from $0.22 to $0.34 (a 55% increase), although this rate of increase has slowed in the past years. Based on current prices, the stock has an annual yield of around 4.5%.
It’s also worth noting that Hannon Armstrong is relatively insulated from the business-slowing effects of COVID-19. Its projects focus on renewable energy and energy-efficiency assets — stable businesses that are considered essential. In other words, it’s not involved in any personal-service businesses (like restaurants and casinos) that could be shut down for months to come.
Over time, HASI should be able to grow profits at a double-digit or high single-digit rate. This growth will translate into higher dividends for investors. And the stock is pretty cheap at current levels, based on two common metrics: price-to-earnings (P/E) and price-to-book (P/B). Over the past few years, HASI steadily grew its profits and its book value, making the stock inexpensive at current levels.
No matter who wins the November presidential election, clean energy should grow rapidly because it is finally becoming competitive with energy produced by fossil fuels.
Joe Biden, in particular, is a long-term supporter of technologies that will reduce the production of CO2 that is thought by most scientists to be a main contributor to climate change; he recently put clean energy at the center of a $2 trillion plan to revive the US economy.
The goal is to reach net-zero CO2 emissions by 2050. Green New Deal supporters want the target date to be changed to 2035 – and will probably get their wish.
In our model portfolio, we are already ahead of the clean energy trend with our investments in two of the industry’s most promising companies: SunPower Corp. (SPWR) and Vestas Wind Systems (VWDRY).
I recommend both stocks for long-term accounts — including family trusts and retirement funds for your children and grandchildren. As with all energy investments, SPWR and VWDRY will undoubtedly be cyclical. Although no investment is a slam dunk for long-term success, clean energy comes as close to that mark as Wall Street ever gets.
Utility stocks are typically viewed as “defensive.” That is, utility stocks usually hold up better than the broad market during downturns. The consistency of the group’s businesses plus their above-average dividend yields makes them a “safe haven” for investors.
My favorite stock among utilities is NextEra Energy (NEE). Based in Florida, NextEra Energy offers a lot to like in the utility space including a growing service region and exposure to alternatives and renewables. Indeed, the firm is the world’s largest producer of wind and solar energy.
The stock has a big universe of potential owners. Because of its position in renewables, NextEra Energy is one of the few utilities that scores well in many ESG (environmental, social, and governance) screens. Thus, ESG investors who want exposure to utilities for market benchmarking purposes will likely choose NextEra Energy.
The company has solid growth. NextEra should show good top- and bottom-line growth in 2020 and 2021. The utility also offers above-average dividend growth. NextEra boosted its dividend 12% earlier this year. That is an impressive growth rate for any company let alone the utility sector. And that increase occurred at a time when dividends are under pressure.
While the dividend yield of 2% is on the low side for utilities, the company should more than make up for the low yield with ample dividend growth and capital appreciation. The stock should remain a leader in the group and is a “must” holding for utility investors.
Israel-based SolarEdge Technologies (SEDG) is a leader in one of the fastest-growing industries around. Every year, more and more folks turn to solar energy — its growth has been astounding.
Nearly 250,000 Americans now work in solar. Last year, the solar industry generated $18.7 billion of investment in the American economy. But there’s a crucial factor at play: solar isn’t just about feeling good about your choices; it’s truly smart economics.
What makes SolarEdge different is that it has come up with an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic (PV) system.
It’s really all about costs. SolarEdge is on its way to becoming the de facto solar inverter manufacturer with its DC voltage optimizer strategy, versus the more expensive micro-inverter strategy used by its rivals.
For Q2, the company earned 97 cents per share. That crushed the Street by 44 cents per share. Revenue grew 2.1% to $331.85 million, beating estimates by $12.3 million. During the quarter, SolarEdge shipped 3.5 million solar power optimizers. That’s down from 5 million during Q1.
Now let’s look at guidance. For Q3 SolarEdge expects revenues between $325 million and $350 million. The consensus on Wall Street had been for $337 million.
Thanks to these impressive numbers, I’m giving SolarEdge a rating of Five Stars. That makes it a Strong Buy. Be aware that SolarEdge can be a volatile stock. But if you don’t mind the bumps, SolarEdge is well positioned to profit from the new age of energy from the sun.
While we’re not normally fans of very low-priced stocks, Plug Power (PLUG) has been around for a while, is liquid and is just beginning what looks like a multi-year growth wave thanks to two big drivers, suggests.
The first is its hydrogen fuel cells (hydrogen goes in, electricity is produced, heat and water are the only by-products; it’s greener and cheaper for customers), which are quickly being adopted in a bunch of transportation (30% of the country’s groceries are transported on vehicles that use its fuel cells).
In addition, there’s plenty of growth potential from there) and materials handling uses (forklifts are a giant opportunity, with firms like Walmart, Kroger, Fiat Chrysler and Sysco already customers, and there are millions more forklifts that could be retrofitted).
Beyond that is Plug’s hydrogen infrastructure, which has taken a big leap thanks to its recent buyout of United Hydrogen — Plug is actually the country’s leading consumer of hydrogen, and should fuel cells grow in popularity, it thinks supplying hydrogen to others could eventually be a bigger market than selling fuel cells!
During the next four years, management has a target to grow revenue nearly fivefold while cash flow (EBITDA) expands at a very healthy clip. Don’t invest the rent money, but Plug looks like an interesting speculation that may finally be turning the corner.
Mixing political preference with portfolio strategy is often hazardous to your wealth. Nonetheless, elections have consequences, especially for highly regulated industries like electric utilities.
And former vice president Joe Biden’s prospective energy plans have loomed large for this sector for some time. To change American energy policy, a prospective Biden Administration would have to work with industry.
The irony is the electricity sector is already well down the road it wants to take. For example, a number of utilities have already pledged to reach net zero CO2 emissions within the 2040 to 2050 time frame. That includes the companies that historically have been the largest users of coal such as American Electric Power (AEP), Dominion Energy (D), Duke Energy (DUK), Southern Company (SO) and Xcel Energy (XEL).
A prospective Biden Administration could actually get most of the way to its clean energy goals simply by letting industry do the job for it, and otherwise staying out of the way. Offshore wind development is one great example. Indeed, swift action by a prospective Biden administration could accelerate activity quickly.
Doing so would greatly accelerate long-term earnings growth for lead developers like Avangrid Inc (AGR) and EverSource Energy (ES). And it would also allow the industry overall to scale up much faster, cutting all-in costs. That would provide a major lift for Dominion Energy, which as of now has the only operating offshore wind project in US waters.
As America’s largest producer of wind and solar, it’s hardly surprising that shares of NextEra Energy (NEE) have gained steam as Biden has risen in polls. And so have shares of pure play renewable generators like Atlantica Sustainable Infrastructure PLC (AY).