The energy market is undergoing a techonomic shift. Global economies are in the process of switching from fossil fuels to cleaner alternatives like renewable energy. It’s a massive undertaking that could cost more than $100 trillion over the next three decades.
Investors won’t want to miss the energy transition megatrend. So, whether you’ve got $5,000 or some other amount to invest, you’ll want to consider putting some of that cash into a company focused on this trend.
Three energy stocks that our contributors believe can benefit from the transition are French energy giant Total (NYSE: TOT), clean energy producer Clearway Energy (NYSE: CWEN)(NYSE: CWEN.A), and global renewables leader Brookfield Renewable Partners (NYSE: BEP). Here’s why they think these energy stocks are great buys for the long haul.
Shifting with the times
Reuben Gregg Brewer (Total): France’s giant integrated oil company Total has announced that it is going to change its name to TotalEnergies. This isn’t some small move, either — it’s meant to highlight a major directional shift taking shape, as Total uses the cash it generates from carbon fuels to build up an “electrons” business. The goal is to triple the size of this “electrons” business between 2019 and 2030.
Natural gas, a transition fuel, will also increase in importance at Total over that span while oil scales down, as the company focuses on only its best assets. The key here is that Total is working to change along with the world around it. At the same time, the company has stated multiple times that it is committed to its dividend so long as oil averages around $40 a barrel. So, unlike its European peers that have cut dividends as they announced clean energy transitions, Total is making the shift and continuing to reward investors. Meanwhile, U.S. integrated energy giants haven’t really moved as quickly on the clean energy front.
That makes Total and its generous 6.8% yield a solid middle ground option in the energy sector. It’s hardly perfect, of course, but it really does offer dividend investors a good compromise between the old and the new.
Focused on a megatrend
Matt DiLallo (Clearway Energy): The global economy needs to invest an estimated $100 trillion over the next 30 years to transition its power source from fossil fuels to lower carbon options. That megatrend is an enormous opportunity for companies focused on investing in cleaner energy options. Those with the right strategy should be able to produce market-beating total returns for years to come.
One company that I think is well positioned to benefit from the energy transition is Clearway Energy. The company owns a portfolio of renewable energy assets like wind farms and solar assets, cleaner natural gas power generation, and district energy operations. These clean energy assets generate steady cash flow backed by long-term contracts, supporting Clearway’s current dividend that yields 4.6%.
The company estimates that it can grow that payout at a 5% to 8% annual rate for the foreseeable future. Powering that outlook is the company’s ability to acquire cash-flowing renewable energy projects from its sponsor and third-party sellers. The company secured $880 million of new investments over the past year. That should help power its plan through 2023, considering the timeline of some of those projects.
Given the enormous need for renewable energy investments in the coming years, Clearway should have no shortage of opportunities to grow in the future. Because of that, it looks like an ideal stock to buy and hold for the long haul since it should be able to generate a steadily rising stream of cash flow for years to come.
This stock could earn you double-digit annualized returns
Neha Chamaria (Brookfield Renewable Partners): Brookfield Renewable Partners is already one of the world’s largest producers of energy from renewable sources, but the long-term investing thesis for the stock has only gotten stronger with the company’s aggressive ongoing efforts to diversify within the industry.
You see, while Brookfield still derived a little more than half its revenue from hydroelectric power in 2020, hydro’s share has declined slowly yet gradually in recent years as management has sought to widen its solar and wind capacity. The company took a big leap last year when it acquired the wind-and-solar specialist TerraForm Power. In another example, Brookfield also started constructing one of the world’s largest greenfield solar projects in Brazil last year. Brookfield’s wind and solar segments combined reported a 51% jump in funds from operations (FFO) in 2020 as management supplemented projects coming online with inorganic growth via acquisitions.
That makes Brookfield one of the most diversified renewable energy stocks. To top that, the company’s growth plan suggests it could grow FFO per share by mid-to-high single-digit percentages through 2025. Given Brookfield’s history, any growth in FFO should mean higher dividends as well, which means owners of Brookfield Renewable shares can expect solid annualized returns. With Brookfield also yielding a decent 3%, this energy stock’s one to keep.
10 stocks we like better than Total SA
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Matthew DiLallo owns shares of Brookfield Renewable Partners L.P. and Clearway Energy, Inc. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer owns shares of Total SA. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.