Renew Your Faith in Green Energy Stocks With This Canadian Trio!

TransAlta Renewables Inc. (TSX:RNW) goes head to head with two competitors for inclusion in a green energy portfolio.

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Three giant energy stocks of the TSX index come to mind when one thinks of renewables; and with oil lower weighing on the sector, what better time to look to greener pastures? With some decent market fundamentals, some dividends, and some growth, there’s a good mix of what makes Canadian energy stocks so popular right here, tailored for the ethical investor and the passive income portfolio manager alike.

Northland Power (TSX:NPI)

A so-so 12 months saw Northland Power’s one-year past earnings growth of 1.2% match the Canadian renewable energy industry point-for-point; meanwhile, a five-year average past earnings growth of 38.3% shows that in less turbulent times, this is a generally positive asset.

Before we move on to the bad news, a dividend yield of 5.15% puts Northland Power on the radar for TFSA and RRSP investors, with a 15.5% expected annual growth in earnings signaling a return to a cheery outlook.

However, with a high debt level of 508.3% of net worth, this stock is far from being a risk-free pick, which is one of the biggest blights on an energy stock’s balance sheet on the TSX index. Couple it with a bloated P/B of 5.3 times book and you have a couple of good reasons to stay away for the time being.

Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN)

Trading at a 25% discount, Algonquin Power & Utilities had a tough 12 months: its one-year past earnings of -9.2% failed to beat its own five-year average past earnings growth of 9.7%. However, with a P/B of 1.7 times book and 27.5% expected annual growth in earnings, it beats the previous stock on per-asset valuation and projected income.

It’s come to something when a debt level of 100.4% of net worth makes one stock look more attractive than another, but here we are. Again, this is not a good choice for investors in the TSX index with a low appetite for risk. In terms of value, passive income investors will have to balance a P/E of 64.3 times earnings with a trailing dividend yield of 4.8%.

TransAlta Renewables (TSX:RNW)

Looking at the stats for TransAlta Renewables stock after the last two tickers is like taking a long, warm bath: a P/E of 16.5 times earnings and P/B of 1.3 times book are much closer to the kind of valuation a passive income investor should look for in a TFSA or RRSP energy stock pick. Newcomers to the Toronto Stock Exchange could do far worse than to add this star stock to a tax-free savings account, while retirement investors likewise have a strong play right here.

A dividend yield of 8.2% looks tasty, and 44.1% debt just grazes the significant threshold while being far below the levels seen for the last two stocks. An 8.2% expected annual growth in earnings rounds out the reasons to buy this renewables gem, thereby signifying as it does a cheerful prospect for a TSX index energy stock.

The bottom line

A P/E ratio of 15.2 times earnings puts Northland Power in line with Algonquin Power & Utilities. Value investors and those looking for passive income from stock in green energy companies listed on the TSX index should favour TransAlta Renewables with its over 50% discounted share price and positive year-on-year earnings growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning 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 richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.

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