Green Future: Top 3 Canadian Renewable Energy Stocks to Watch

Watch out for elevated volatility on Algonquin Power and Utilities and two other renewable energy stocks this earnings season.

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The first-quarter 2023 earnings season is upon us, and price volatility may increase on three Canadian renewable energy stocks this month.

Renewable energy stocks are increasingly in the investment community’s focus as governments move to promote a green future. More than 200 financial institutions globally have reportedly established strict policies restricting coal investment – double the number in April 2019. Climate action is going full throttle and green energy will undoubtedly power global economies in the future.

Canadian renewable energy stocks may potentially outperform the market. Government tax credits, contained inflation rates, and stalled interest rate hikes create a stable, favourable planning environment for green energy projects to flourish.

Below are three Canadian green energy stocks to watch in May.

Algonquin Power and Utilities Corp

Algonquin Power and Utilities (TSX:AQN) is a renewable energy and water utility stock to watch right now as activist investors circle around the volatile dividend stock. The green utility is riddled with a heavy $9.5 billion debt load that weighed heavily on distributable cash flow generation in 2022, stalled AQN’s growth plans, and necessitated a 40% dividend cut in January. The $8.2 billion stock could still make a comeback.

AQN stock price is up 36.5% year to date, a respectable recovery making investors more comfortable holding on.

The company’s wind, solar, and hydroelectric power generation and distribution assets have promising long-term growth prospects, and activist investors may chip in to shake up and shape up its business strategy.

Activist investor Corvex Management reportedly amassed Algonquin Power stock in April and conducted its first “friendly” meeting with the company’s management soon afterward. Bloomberg reported that another activist investor Starboard Value LP was in talks with AQN management for weeks in April.

Undoubtedly, activist investors can influence strategic and management changes at targeted firms. It’s possible that Algonquin Power could make some changes to its asset sales, business plan, financial strategy, or management composition. Something could happen at any time.

Algonquin Power is set to release its first quarter 2023 earnings before markets open on Thursday, May 11, 2023. It pays a quarterly dividend that yields 5% annually.

Northland Power Corp

Northland Power (TSX:NPI) is an $8.2 billion Canadian renewable energy stock with a global footprint. It operates offshore and onshore wind and solar energy facilities, and efficient natural gas-powered power plants. Following an impressive show in February when Northland Power’s fourth-quarter 2022 earnings doubled year over year, investors eagerly await the green energy stock’s first quarter 2023 earnings scheduled for release on May 9, 2023.

The renewable energy company’s earnings surged due to excess production capacity and strong pricing in 2022. However, significant profitability drivers included gains on derivative contracts and foreign exchange, both of which are volatile, nonreliable sources of earnings growth.

A price cap on European renewable energy, effective December 1, 2022, to June 30, 2023, could limit revenue growth. However, the future looks brighter given the company’s recent execution of the largest battery storage project in Canada and ongoing expansion projects around the globe.

Bay Street analysts project a 7.9% decline in first-quarter revenue to $640 million. The renewable energy stock is down 11% so far this year. However, insiders are buying NPI stock, a potential confidence builder for investors looking to add Northland Power stock to their long-term oriented green energy portfolios right now. The company pays a monthly dividend that yields 3.7% annually.

TransAlta Renewables

TransAlta Renewables (TSX:RNW) stock is a $3.4 billion Canadian renewable energy stock that I regard as a speculative passive income play. It pays a monthly dividend yielding 7.4% annually, and RNW stock is up 16% year to date. Like Algonquin Power, TransAlta Renewables is in recovery mode, investors will be keen to review its financial performance as it reports first-quarter earnings on Friday, May 5, 2023.

Given higher borrowing costs and contract expirations, the company warned in December 2022 that it could potentially pay out 100% of its distributable cash flow this year, leaving nothing for growth investment projects.

However, in February, the company announced a 10-year contract extension with Kent Hills that extended its existing long-term relationship with New Brunswick Power. The deal was concluded at a 10% discount to prior contract prices. Investors should watch how distributable cash flow generation performed during the past quarter to gauge the safety of TransAlta Renewables’ high-yield monthly dividend.

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 Brian Paradza has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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