Did you just get a return on your taxes this past year? If so, then you just received a check that can immediately go into your investment account. That, of course, means you have some new money you'll want to put toward stocks. Despite the recent volatility, the market still looks rather richly valued, unless you're talking about energy stocks.
So, we asked three of our investing contributors to each highlight an energy stock they see as a great buy this month. Here's why they picked ExxonMobil (XOM -2.78%), Hannon Armstrong Sustainable Infrastructure Capital (HASI 2.12%), and TerraForm Power (TERP).
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What have you done for me lately?
Reuben Gregg Brewer (ExxonMobil Corporation): Exxon is one of the world's largest integrated oil companies. Its management has a long history of conservative stewardship. That was a seen as a benefit after oil prices started to plunge in the middle of 2014. But let's put some numbers on that: Between mid-June 2014 and mid-January 2016 (when commodity prices started a broad rebound), oil prices fell 75%, Exxon's stock price declined 25%, and its major peers all lost 35% or more of their value.
Notably, Exxon continued to increase its dividend each year, when most of its competitors were unable to do so. Its annual dividend streak is now up to an incredible 35 consecutive years. And while it had to rely on the strength of its balance sheet to ride out the downturn, debt peaked at around 15% of its capital structure -- a modest level for any business. But Wall Street always things short term, and now that oil prices have rebounded from their lows, Exxon's stock is lagging its peers.
There are reasons for this, including the fact that peers have caught up to (and even surpassed) Exxon's return on capital employed numbers. And its production was relatively weak in 2017. Essentially, investors appear concerned that Exxon is playing catch-up. The fact that the oil major is materially boosting spending over the next few years appears to back that storyline up.
Only Exxon is a conservative giant that moves slowly and deliberately. Lagging during the upturn is part and parcel with better weathering the downturn. If you can think long term, Exxon's stock at a 4%-plus yield, the high end of its historical range, is a bargain. If history is any guide, it will turn the ship before too long.
Energy's hidden gem
Travis Hoium (Hannon Armstrong Sustainable Infrastructure Capital): One of the biggest challenges in renewable energy, efficiency, and infrastructure is financing projects. A rooftop solar system may save a school or government building thousands of dollars a month, but it's often tough to get the funds approved for the initial investment if the payback occurs over 7-10 years. Energy efficiency is even more challenging because few entities will finance replacing incandescent light bulbs or an HVAC system, even if the payback period is just a few years. These challenging energy projects are what Hannon Armstrong specializes in.
Hannon Armstrong has four asset classes -- efficiency, wind, solar, and sustainable infrastructure -- that it invests in, and each project is a little different. For example, it financed over $26 million in energy efficiency upgrades for the city of Louisville, Kentucky, that will save the city $2 million per year. The city will then use that savings to pay off the financing over 23 years, a win-win for both the government and Hannon Armstrong. In wind, Hannon Armstrong likes to take a preferred equity position, which means it has a high likelihood of generating positive cash flow and is first in line if something goes wrong with the project. These are just two examples of what the company finances among its $2.3 billion of investments in 175 projects across the country.
The investments Hannon Armstrong makes are intended to generate a certain rate of return long term, which is ultimately used to grow earnings and pay the company's dividend. In 2017, core earnings per share rose 6% to $1.27, and the quarterly dividend of $0.33 per share was paid to shareholders earlier this month. That's a 7% dividend yield for a company investing in high-quality energy assets in a diverse group of growing energy markets. That's why this is a top energy stock to buy in April.
Under new management, thankfully
Tyler Crowe (TerraForm Power): It has to have been an extremely frustrating experience being an investor in TerraForm Power when now-bankrupt SunEdison owned it. On the surface, it's a business that a ham sandwich should be able to run successfully: Sell solar and wind power to customers under long-term fixed-rate contracts. All you have to do is collect the checks, pay investors a reasonable dividend, grow at a reasonable rate, be price-conscious when acquiring new assets, and not take on too much debt.
Unfortunately, SunEdison's management team couldn't pass the ham sandwich test as it grew at an unreasonably fast rate with little to no regard for acquisition prices and loaded itself to the gills with debt. This left TerraForm's great asset portfolio buried under a defunct parent company. Thankfully, though, Brookfield Asset Management (BN 1.81%) took the controlling stake of TerraForm Power off of SunEdison's hands, which should bode much better for investors over the long run.
Brookfield has a great track record of turning assets like TerraForm Power's -- see, Brookfield Infrastructure Partners and Brookfield Renewable Partners -- into high-return businesses that have crushed the S&P 500 on a total return basis. Also, Brookfield Asset Management appears to be putting deploying the same game plan as it does with its other energy- and infrastructure-related businesses: Pay out 80% to 85% of available cash as a dividend, retain the rest to support growth funding, and target a modest growth rate of 5% to 8% annually. Brookfield estimates that it can achieve much of that growth early on by simply squeezing out some operating efficiencies and amortizing some debt over the next few years.
BIP Total Return Price data by YCharts.
TerraForm Power's underlying business always looked attractive, but SunEdison's management plan was absolutely radioactive to shareholder value. With Brookfield Asset Management at the helm and implementing a proven game plan to generate returns, TerraForm's stock looks pretty attractive right now.
