Warren Buffett and his company Berkshire Hathaway had the fattest purse in hand when the stock market declared a very early Christmas sale in March and put a sizeable discount tag on almost all the securities. Still, Buffett exercised the financial discipline that is characteristic to people of his stature and financial wisdom. But when Buffett didn’t buy anything for a long time, people started wondering why.
The monotony finally broke when Buffett bought nearly US$10 billion of Dominion Energy, including a big chunk of the gas-processing and storage facility and a whole pipeline. The rest went towards the debt that Buffett took off from Dominion’s hands.
The bet on natural gas
The move was also met with skepticism, because Buffett bet on natural gas when the U.S. is slowly transitioning to green energy, especially towards solar and wind power. In the past five years, renewable energy has grown from making up 13% of the total energy providers of the country, to 20%. An analyst who covers Berkshire Hathaway stated that “future doesn’t come as fast as some people think.”
If that’s the reasoning behind buying Dominion and expanding his energy empire, it means that Buffett believes natural gas is going to stay relevant for many years to come — and not just relevant, but profitable, because Buffett bought into the company at a time when natural gas prices are at a record low levels.
Some experts believe that the energy deal is very sweet for Buffett, but not so much for Dominion. The wizard of Omaha leveraged the market crash smartly and bought considerable assets at bargain prices.
Your bet on renewable energy
If you side with Buffett’s critics on his Dominion Energy move, then instead of betting on natural gas, you might prefer to bet on the clean energy future. In that case, you might be interested in Boralex (TSX:BLX). This Kingsey Falls-based, $3.37 billion market cap company produces 2,040 MW as of now, and the plan for 2023 is to expand this capacity up to 2,800 MW.
The company focuses on four primary sources: wind, solar, hydroelectricity, and thermal. It also pays dividends with it has increased four times in the past five years. Still, the payout ratio is too erratic to count on dividends being as sustainable as the company’s energy sources are. But a much better thing that the company offers its investors is its capital growth prospects.
In the past five years, the company returned a sweet 192% to its investors. That equates to a CAGR of almost 24%. And Boralex’s recovery from the crash is even more impressive than its past five-year performance. The stock is currently trading at a price that’s 10% higher than its pre-pandemic peak.
Warren Buffett’s energy deal, especially at a time when the sector is suffering due to low demand, fits neatly with his strategy of buying good businesses at the right value until they remain good businesses. And if he has made such a substantial purchase now, that means he believes natural gas might remain a good business for many years to come.
Still, it might be prudent to stick with renewable energy, which might have an even greener future, and for a significantly longer time.
Speaking of Warren Buffett...
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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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends BORALEX INC. and Dominion Energy, Inc and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares).