Investing in megatrends may provide investors with an opportunity to create game-changing wealth over time. One such megatrend is clean energy, as countries are expected to allocate trillions of dollars to fight climate change and move away from fossil fuels.
A report from Precedence Research estimates the global renewable energy market will expand from US$970 billion in 2022 to US$2.18 trillion in 2032, indicating a compound annual growth rate of 8.5% in this period.
Two publicly traded companies operating in this sector are NextEra Energy (NYSE: NEE) and Brookfield Renewable (TSX: BEP.UN). Shares of both companies are trading lower than their record highs, as investors are worried that rising interest rates and inflation will narrow profit margins in the near term. But the pullback allows you the opportunity to buy quality dividend stocks for a discount and benefit from outsized gains over time.
So, let’s see which renewable energy stock is a better buy right now.
Is NextEra Energy stock undervalued?
Down 39% from all-time highs, NextEra Energy is valued at a market cap of US$117 billion. NextEra generates 70% of its earnings from its regulated utility operations and the rest from clean or renewable energy.
NextEra also pays shareholders an annual dividend of US$1.87 per share, translating to a forward yield of 3.3%. These payments have risen at an annual rate of 9.9% in the last 20 decades, showcasing the resiliency of the company’s cash flows.
Moreover, NextEra emphasized it would grow earnings between 6% and 8% through 2026, which suggests dividend hikes would continue in the near term.
NextEra Energy is among the largest regulated utility players south of the border and is part of a recession-resistant sector. Priced at 16.4 times forward earnings, NextEra Energy stock is not too expensive and trades at a discount of 28% to consensus price target estimates.
What is the target price for Brookfield Renewable stock?
Down 44% from record highs, Brookfield Renewable Partners has already delivered market-beating returns to shareholders. In the last 20 years, the TSX stock has returned over 1,400% after adjusting for dividends. Despite these outsized gains, it currently offers shareholders a forward yield of 5.2%.
Moreover, Brookfield Renewable expects to deliver annual returns between 12% and 15% going forward due to the worldwide transition towards clean energy solutions.
Since 2012, Brookfield Renewable Partners has increased its funds from operations, or FFO, at an annual rate of 10%, allowing it to reinvest capital in growth projects, strengthen its balance sheet, increase dividends, and target highly accretive acquisitions.
Brookfield Renewable is positioned to expand its base of cash-generating assets in the next decade. For instance, its development pipeline capacity is 4.5 times higher than the installed capacity.
Analysts remain bullish and expect shares to touch US$31 in the next 12 months, 20% higher than the current trading price.
The Foolish takeaway
It’s quite difficult to choose a winner between the two renewable energy giants. Investors can consider gaining exposure to both NextEra Energy and Brookfield Renewable and diversify their portfolio further in 2024.
