Tesla (TSLA 2.44%) was by far the best-performing renewable energy stock last decade. Shares of the electric vehicle (EV) maker have gained an eye-popping 2,040% since its initial public offering about 10 years ago, which has obliterated the S&P 500's roughly 209% return during that timeframe. Powering the stock has been a steady stream of innovation, including the rollout of its mass-market Model 3 sedan.
While the stock could have further to run, investors value it at an insane premium to other automakers even though it's not profitable. At some point, it will need to start making money to justify its valuation. If it struggles to turn a profit, then the stock could tumble.
That's why I think investors who are looking for a renewable energy stock should forget Tesla and consider Brookfield Renewable Partners (BEP -4.68%) instead. It offers visible growth, with a lot less risk, which could give it the power to produce higher total returns than Tesla in the coming years.
A long track record of growing shareholder value, with plenty of power to keep going
Brookfield Renewable Partners has also enriched its investors since its formation. Over the past two decades, the renewable energy producer has generated an average total return of 17% annually, which has significantly outperformed the S&P 500's 6% average annualized total return during that timeframe.
Powering those strong returns has been the company's consistent ability to grow both its cash flow and its high-yielding distribution to investors, with the latter rising at a 6% compound annual rate since 2012. Driving Brookfield's growth has been its returns-focused investments in the construction and acquisition of new hydro, wind, solar, and energy storage assets. By focusing on investing for returns, Brookfield has been able to generate value-enhancing earnings growth.
The company expects that trend to continue for at least the next five years. It anticipates that organic growth alone will power 6% to 11% annual earnings growth, while acquisitions will bolster its bottom line by another 3% to 5% per year. The high end of those targets will be even more achievable if the company is successful in acquiring fellow renewable power producer TerraForm Power (TERP).
That visible growth makes it a much less risky option compared to Tesla, which is banking that car buyers will continue purchasing its vehicles over those produced by rivals, which are increasingly focusing their attention on building EVs.
A top-tier financial profile
One of the major risks of investing in Tesla is its financial profile. Because the company isn't profitable, it needs outside capital to fund its operations and expansion. While the company had $5.3 billion of cash on its balance sheet at the end of the third quarter, it also had $14.6 billion in debt and is burning through money to expand. That has left it with junk-rated credit, which makes it costlier for the company to borrow money. That's not an issue right now given its cash position, but it could be in a few years, especially if economic conditions deteriorate.
Brookfield, on the other hand, has a top-notch balance sheet backed by the highest credit rating in the renewable energy sector. That gives it significant access to low-cost funding. The company, however, doesn't need much outside capital to execute its five-year strategy, which will see it invest about $4 billion into development projects and acquisitions. It expects to finance nearly half of that investment with retained cash flow after paying its dividend as well as targeted asset sales. It plans to fund the rest with a combination of new debt, refinancing, and preferred equity sales. Given its top-notch financial profile, it shouldn't have any trouble accessing this financing at attractive rates, even if market conditions deteriorate.
A better risk-adjusted option for investors
Tesla has been a fantastic investment over the past decade. It could continue to enrich investors in the coming years as the auto market goes electric. However, because it trades at an excruciatingly high valuation when we consider that it's primarily a car maker, there's an outsize risk that the company might have trouble continuing to produce market-beating gains in the coming years, especially if there's a major economic recession.
Brookfield Renewable, on the other hand, offers investors visible growth backed by a top-notch financial profile, so it should continue producing outsize total returns, even if market conditions deteriorate -- since that would provide it with opportunities to potentially earn even higher returns on acquisitions. That makes Brookfield Renewable a better clean energy option, especially for investors concerned with risk.