Energy stocks are one of the great selling points of the TSX index: anyone coming to Canadian investing for the first time gets directed toward them, with some classically defensive dividend payers finding their way into the utilities sections of portfolios up and down the country. There are a lot to choose from, too, with everything from natural gas to electricity suppliers jostling for shareholders’ attention.
But when it comes to renewables, that range of choice becomes somewhat narrower. Wind power, wave energy, solar radiation, and mixes of natural gas and turbine-fed grids make up the green energy sector – but the suppliers of these alternative energy sources are somewhat fewer in number than their fossil fuel competitors. Below you will find two of the best green energy stocks on the TSX index chosen for their overall health and dividend yields.
Northland Power (TSX:NPI)
If it’s defensiveness you’re looking for, a hefty market cap of $4 billion should fit the bill. In terms of past performance, a one-year past earnings growth of 3.7% beats the industry contraction for the same period, while a five-year average past earnings growth of 32% remains a high-water mark that may be difficult to best.
Value-wise, a summer sell-off sees this classic renewable energy stock discounted today by more than 50% of its future cash flow value, backed up with a P/E ratio of 16.5 times earnings, and sober PEG of 0.8 times growth.
Speaking of growth, a 21.4% expected annual growth in earnings over the next one- to three-year period continues this stock’s positive streak, while a return on equity of 24% last year adds to the quality quotient. A sizeable dividend yield of 5.75% also makes this one to buy and hold long-term. Inside buying has outstripped insider selling over the last 12 months, indicating a certain amount of confidence among those who may know something we don’t.
However, a high comparative debt level of 534.3% of net worth and P/B of 4.9 times book should be taken into account by value investors with little appetite for risk: in terms of assets, Northland Power is not good value, and with debt that high, it’s potentially rather risky to hold for the long run.
TransAlta Renewables (TSX:RNW)
A market cap of $3 billion puts TransAlta Renewables in defensive territory; however, a one-year past earnings contraction by 7.1% matches the industry while trailing its own meagre five-year average past earnings growth of 0.6%. The last 12 months has seen more inside selling than buying of this stock, which doesn’t bode well in terms of insider confidence.
Discounted by more than 50% of its future cash flow value, getting a hold on the true valuation of this stock is somewhat tricky: a P/E of 29.6 times earnings is pretty high, as is a PEG of 2.3 times growth, though price per book is 1.2 times. However, things pick up hereafter: a 12.8% expected annual growth in earnings over the next couple of years is positive, while a high dividend yield of 8.62% and acceptable debt of 43.2% of net worth make up an attractive energy stock.
The bottom line
Whether you’re an ethical investor looking to pad out the green energy section of your portfolio, or a canny long-term growth investor after some passive income in an industry set to really take off in coming years, the two stocks above make for a perfect couple to buy and hold.
Iain Butler and his team of analysts are giving away one of their top TSX stock picks for 2019 for FREE – for a limited time.
They’ve already helped Stock Advisor Canada members outperform the market by 8X in 2018, but now they’re laser-focused on helping investors in 2019 and beyond.
Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.