March was a brutal month for the energy market. The average energy stock in the S&P 500 cratered 35%, after more than a 50% plunge in the price of crude oil. Fueling that painful sell-off was the impact the COVID-19 outbreak is having on the global economy, and therefore demand for energy.
That sell-off took most energy stocks down with it, including shares of several high-quality companies. Three attractive opportunities for investors with a long time horizon are Brookfield Infrastructure Partners (NYSE:BIP), NextEra Energy (NYSE:NEE), and TC Energy (NYSE:TRP). Here's why they look like excellent buys this April.
As recession-resistant as they come
Brookfield Infrastructure lost about 29% of its value in last month's market meltdown. That sell-off is due to two main issues. First, Brookfield will feel some effect from the global economic shutdown, especially at its ports and rail operations. On top of that, the company lost out on the bidding for data infrastructure company Cincinnati Bell despite raising its offer multiple times.
However, the company has a relatively recession-resistant business overall. That's because the utilities and energy infrastructure assets it owns generates stable cash flows backed by long-term fee-based contracts or regulated rates where it gets paid regardless of volumes.
On top of that, Brookfield Infrastructure has a long history of taking advantage of market dislocations to make needle-moving acquisitions. It's in a prime position to do that thanks to its top-notch balance sheet and the fact that the Cincinnati Bell deal fell through, which frees up that capital to pursue a potentially better opportunity. Add that upside to Brookfield's attractive dividend, -- which now yields almost 6% following last month's sell-off -- and it's a great low-risk income stock to buy this month.
The future of energy
Shares of NextEra Energy have declined by about 20% from their highs earlier this year. While the company will feel some impact from the likely economic recession as a result of the COVID-19 outbreak, it won't affect the company as deeply as others in the energy sector. That's because the demand for electricity at its two Florida-based utilities should bounce back quickly once business restrictions lift. Meanwhile, the company's renewable energy operations shouldn't experience disruptions because its utility customers will likely shut down higher-cost fossil-fuel electricity generation facilities before rejecting clean power.
Meanwhile, NextEra has the financial strength to weather the current storm. It has one of the highest credit ratings among the large electric utilities and a below-average dividend payout ratio. That provides it with the financial flexibility to continue investing in the expansion of its utilities and renewable energy operations. That growth, when combined with the company's rock-solid 2.5%-yielding dividend, makes NextEra an attractive buy this month.
Built to endure tough times
Canadian pipeline giant TC Energy has lost about 25% of its value this year. This sell-off seems a bit much since the company has insulated its operations from the impact of falling oil prices. That's because 92% of its earnings have no exposure to commodity prices or volumes, meaning it gets paid even if customers don't use their contracted capacity. Meanwhile, most of its customers are financially strong entities with investment-grade credit ratings, which reduces the risk they won't be able to make payments.
TC Energy also has one of the lowest dividend payout ratios and the top credit rating in the pipeline sector. These factors put its 5.4%-yielding dividend on a firm foundation. They also provide the company with the financial flexibility to invest in growth projects, including the recently approved Keystone XL pipeline. Growth projects like that should enable TC Energy to keep increasing its low-risk dividend for many years to come.
Solid energy stocks for these unstable times
Brookfield Infrastructure, NextEra Energy, and TC Pipelines operate relatively recession-resistant businesses that generate stable cash flows. On top of that, all three have top-notch financial profiles, putting them in a better position to weather this storm, which makes them great buys this April following their sell-offs last month.