Global warming is a major issue today, and one of the key solutions is to rely on cleaner, renewable sources of energy -- like solar power. But the world can't just flip a switch; transitioning to new sources of energy takes time. That means solar power has years of growth ahead of it. If you want to step into what is likely to be a multidecade renewable power growth market, you should take a look at First Solar (FSLR -0.06%), TerraForm Power (TERP), and NextEra Energy (NEE -0.27%) right now.
1. The "riskiest" option
First Solar makes solar panels. That's not an easy business because First Solar has long had to invest heavily just to keep up with the competition as solar panel quality improves and panel prices decline over time. In fact, its free cash flow has dipped deeply into negative territory over the past year or so as it invests in the next round of solar panel technology (it calls its newest technology Series 6). First Solar could easily end up bleeding red ink on the bottom line in 2019.
But here's what makes this solar panel maker stand out: cash. First Solar had roughly $1.5 billion in cash (and marketable securities) at the end of the third quarter of 2019. That's extra noteworthy given that long-term debt makes up less than 10% of the company's capital structure. In fact, it has more cash than it has long-term debt! Put simply, First Solar's balance sheet is rock solid. It can afford to stay at the leading edge of the solar panel industry.
The stock has had a nice run so far in 2019, up around 26% along with the broader market, even though earnings aren't likely to be very good this year (partly because of heightened capital spending needs). However, if you are a long-term investor and want to own a leading industry supplier that has the financial strength to remain an industry leader, than First Solar should be on your solar buy list today.
2. A family affair
The next name to consider is TerraForm Power. Roughly half of its revenue comes from solar power assets, with the rest largely from wind. Over the next year or so, it will actually be working to upgrade its wind power assets, but it remains a key player in solar just the same. Interestingly, despite providing half of TerraForm Power's revenue, solar only makes up about 40% of its generating capacity. Solar is clearly a valuable asset for this focused renewable power player.
What's most interesting, though, is the ownership. In 1997, Brookfield Asset Management (BN 0.33%) purchased a controlling stake in TerraForm Power. (This is a bit of a simplification because Brookfield Renewable Partners, also controlled by Brookfield Asset Management, is a key part of the ownership mix.) That has led to a material change in direction. When Brookfield, one of the largest and oldest players in the infrastructure space, stepped in, TerraForm was financially weak after embarking on an ill-advised acquisition spree. It has since changed directions, thanks to Brookfield's guidance, and is now investing opportunistically in out-of-favor assets. And, with Brookfield's pocketbook as a backstop, it can take on deals that might have been problematic in the past.
It is also working to better manage the assets it already owns (the investment plans it has to upgrade its wind turbines are an example of this). The end goal is to be a slow and steady renewable power company that offers income investors a robust and growing dividend. To put some numbers on that, the current yield is roughly 5.25%, and TerraForm power is targeting mid to high single-digit dividend growth over time.
It may not be the highest yielding name in the renewable power space, but if you are an income investor, TerraForm Power, with the backing of Brookfield Asset Management, could easily be a core holding.
3. The diversified approach
The last name here is NextEra Energy, one of the largest electric utilities in the United States. But that's just one part of its business -- it also happens to be one of the largest renewable power companies in the world. Solar is, as you might expect, a piece of that business. Notably, NextEra controls NextEra Energy Partners, which owns renewable power and sports a handsome 3.9% yield. NextEra's yield is 2.1%, which might make investors wonder why NextEra is on the list and not NextEra Energy Partners.
The answer is diversification. Solar power is, relatively speaking, still in the early stages of its growth. There are bound to be ups and downs along the way. With a large regulated utility business, NextEra has a solid foundation from which to grow its renewable power business. And while the utility is not cheap, it has notable growth prospects on both the utility and renewable sides of its business.
To put some numbers on that, NextEra expects to spend as much as $14 billion a year over the next three years, and around half of that is earmarked for renewable investments. That spending should support continued business growth and dividend growth (the utility is targeting annualized dividend growth of between 12% and 14% a year, making this a solid option for dividend growth investors).
To be fair, wind is much more important to NextEra today than solar. But as it stands now, 2021 and 2022 will be solar years, with signed contracts for 2.8 gigawatts of solar construction projects. That's more than four times the number of wind contracts NextEra has inked. And all of that is backstopped by a government-regulated utility focused on swift dividend growth. If you're looking for a more diversified way to dip your toe into solar power, NextEra is worth a closer look.
3 options for 3 different types of investors
You probably won't find every stock here attractive, but that's the point. First Solar is a picks-and-shovels player in the solar space with the financial strength to be an industry-leading producer of solar panels. It's probably most appropriate for growth-minded investors. TerraForm Power is a yield play controlled by a conservatively run infrastructure expert with a long history of success behind it (Brookfield). Income investors will probably want to do a deep dive here. And for more conservative types who appreciate diversification, NextEra is an interesting mix of a utility and a renewable power company. It's not cheap, but with dividend growth targets in the low double-digits, it might just be worth paying up for this industry giant.