The renewable energy industry, particularly, the renewable utilities industry, is a good place to invest in for the long term. These utility stocks pay dividends for holding their shares and have a long-term growth runway. Investors should pick stocks wisely, though. For example, one of the stocks discussed below cut its dividend earlier this year, despite the seemingly stable nature of utilities in general.
Brookfield Renewable Partners
Brookfield Renewable Partners (TSX: BEP.UN) is riding the wave of the growing renewable power and decarbonization industry. The fact that it has a roughly 32-gigawatt (GW) operational portfolio versus its pipeline of about 132 GW says it all.
Importantly, the company has also been maintaining a desirable investment-grade S&P credit rating of BBB+. Additionally, management set up a long-term average debt term to maturity of about 11 years on primarily fixed interest rates. So, its interest expense is highly predictable.
Notably, the company’s growth can be lumpy because of merger and acquisition activities and the time of the commission of projects. Thankfully, its generation portfolio is about 90% contracted with a long weighted average remaining contract duration of 14 years. This means it’s able to generate substantial cash flows to provide a stable cash distribution to its unitholders.
At writing, it offers a yield of almost 4.6%. Other than targeting 12-15% returns on its investments, management is also committed to increasing the cash distribution by at least 5% per year. At $39.32 per unit, the analyst consensus 12-month price target suggests the top utility stock trades at a meaningful discount of 20%.
Even if we’re super conservative and assume no valuation expansion and funds from operations per unit growth of only 5% annually, the stock would deliver returns of about 9.6% per year over the next five years.
Including valuation expansion, it’s possible for BEP.UN to deliver about 14% per year over the next five years. This is not out of reach because the stock’s 10-year compound annual rate of return is about 13%, and it trades at a discount of about 18% from its trading levels from 10 years ago based on price to cash flow.
- We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Enbridge made the list!
Algonquin stock
Algonquin Power & Utilities (TSX: AQN) is comprised of two core business segments: regulated utilities and non-regulated renewable energy assets. Its regulated utilities are diversified across natural gas, electric, and water distribution and wastewater collection. The regulated utilities portfolio generates about 85% of its revenues in the United States, with the remainder coming from Canada, Bermuda, and Chile. The renewable portfolio consists of wind, solar, hydro, and thermal generation and makes about 74% of its revenues from the U.S. and 11% from Canada.
Because Algonquin primarily consists of U.S. operations, it reports in U.S. dollars and pays a U.S. dollar-denominated dividend. Its payout ratio crept up past 100% in 2022. Coupled with rising interest rates, the utility ended up cutting its common stock dividend by 40% earlier this year.
Today, the stock’s dividend has better coverage with an estimated adjusted earnings payout ratio of 75%. The utility stock also trades at a reasonable valuation. So, it could deliver acceptable returns over the next five years, especially if interest rates revert lower. At US$8.40 per share, analysts believe AQN stock trades at a discount of about 11% and offers a dividend yield of roughly 5.2%.
