Many Canadian energy stocks did superbly well in the last couple of years due to substantially higher energy prices. The rally is partly attributable to super cheap energy stock valuations, because of oil prices that fell as low as to the negatives during the pandemic year of 2020.
That year, Whitecap Resources (TSX:WCP) stock traded as cheaply as less than one times cash flow. As oil prices reverted to the mean, the best investors were able to book price gains that were as much as 11 times their investment!
At $10.15 per share now at writing, Whitecap Resources still seems cheap, trading at about 2.7 times cash flow. However, its growth is more uncertain this year. First, central banks have raised interest rates that are curbing inflation, including oil prices. Indeed, the West Texas Intermediate oil price has been in a downward trend since peaking in June 2022, which is also when inflation was at its highest recently.
Statistics Canada just reported on Tuesday that inflation came in at 5.9% in January. It’s still off from the Bank of Canada’s target of 1-3%. Therefore, don’t expect interest rates to come down anytime soon, unless a big recession hits. Interest rates staying high at about where it is now will clip the wings of high-flying Canadian energy stocks of the recent past. At the very least, investors should expect smaller gains, if any.
For more predictable long-term growth, investors can turn to this top Canadian renewable energy stock that is a Canadian Dividend Aristocrat — Brookfield Renewable Partners (TSX:BEP.UN). It provides more predictable cash-distribution growth from its sustainable cash flows. More importantly, it’s in the renewable energy space, which is where tons of growth is anticipated to be over the next few decades.
Your income potential with this dividend stock
The renewable utility stock currently offers a yield of 5% at about $36.70 per unit. Should BEP be able to maintain a 5% cash distribution growth rate over the next 30 years, units bought today are looking at a yield on cost of 21.6%! Now, that’d make a nice retirement income stream. Essentially, you’d be earning $21.60 for every $100 of initial investment! Of course, this projection is very far into the future.
That said, Brookfield Renewable has already demonstrated its possibilities for income growth. For 13 consecutive years, it has increased its cash distribution every year. Its 10-year cash distribution-growth rate is 5.7%.
The company has operational capacity of 23,600 megawatts (MW), generating quality cash flows across hydro, wind, solar, and distributed energy and sustainable solutions. It has multiple ways to grow, including value investing, asset optimization, and development projects. Its cash flows also have embedded inflation escalation of 2-3%.
Currently, the company sees potential for 102,000 MW of development projects across its diversified portfolio. The team is also smart in making strategic capital recycling. Proceeds from asset sales are used for further growth. Overall, management sees funds-from-operations-per-unit growth potential of 10% per year through 2027.
Through undervalued BEP stock, investors can participate in the long-term growth prospects of renewable energy while getting a 5% cash distribution yield today that can continue growing +5% per year.