The renewable energy industry has been growing like crazy for the last decade. It may have gotten some additional fuel with a new administration taking over next week and extended tax subsidies giving at least a two-year boost to wind and solar energy stocks. If the industry keeps growing, where should your money be?
Three of our contributors put together their picks and SunPower (SPWR 2.25%), NextEra Energy Partners (NEP 3.20%), and Phillips 66 (PSX 1.19%) topped the list, hitting very different sections of the renewable energy industry.
Residential and commercial growth
Travis Hoium (SunPower): There are a number of factors that will drive renewable energy growth in 2021 and SunPower has all of the major ones behind it. First is the extension of the solar investment tax credit, which gives a 26% tax credit for both solar and solar plus storage installations. On top of that, we could see positive policy changes for the solar industry once President-elect Joe Biden takes office, giving even more policy fuel to the industry. Since SunPower finances some of the solar it installs, this subsidy flows to the company.
Second, I think residential and commercial solar will grow rapidly as consumers and companies see on-site energy production as a value they can't pass up. And tax credits and low interest rates help make the financing of those projects possible. You can see below that the residential and commercial solar industries are growing, but that could pick up as subsidies and policies combine with falling costs for going solar.
Third, SunPower will benefit simply from the rise in stock values. Not only does SunPower have more flexibility to sell shares to raise funds for growth or acquisitions at a $5 billion valuation than a $1 billion valuation, as of the end of the third quarter it held 4.5 million shares worth $920 million at today's stock price. That alone could more than pay off SunPower's debt. That's an incredible turnaround from a company that was laden with debt a year ago and had an unprofitable business without a clear path to profitability.
Finally, SunPower is a leader in energy storage and that will be an incremental benefit to solar companies. Even if the amount of megawatts of solar panels installed doesn't go up, adding energy storage increases the revenue and margin per installation and could add revenue for decades by building virtual power plants that SunPower controls. Energy storage is included in about 30% of SunPower's commercial projects today, but it's just getting started in the residential market and should grow significantly in 2021.
Add all of this up and SunPower could be a growth stock again in 2021, a huge turnaround from a year ago.
Steady income from renewables
Howard Smith (NextEra Energy Partners): Growth in renewable energy projects will be high on the agenda of the incoming administration and Congress. There are several ways that investors can look to capitalize. Investing in less established technologies is the high-risk, high-reward approach, which is fine for a portion of a portfolio.
Some investors may want a less risky avenue that should still provide above-average gains. Companies that invest in, and operate, renewable energy infrastructure can be a good niche for that type of investor. NextEra Energy Partners looks to be a good value in that group right now.
NextEra Energy Partners acquires, manages, and owns contracted clean energy projects with stable, long-term cash flows. It was formed as a growth-oriented limited partnership by utility and renewable energy investor NextEra Energy (NEE 0.04%).
In the third quarter, the partnership completed its first two organic growth investments, including a wind power project in Colorado. It also declared a distribution -- the partnership version of a dividend -- that was 15% higher than the prior year's distribution. Its new investments are also contributing to growing its cash available for distributions (CAFD), which increased 10% compared to the year-ago period.
While there are several peers in the industry for investors, NextEra is somewhat unique with low-cost sources of capital, as well as acquisitions from its sister company, NextEra Energy Resources. Brookfield Renewable Partners (BEP 1.92%) can be considered comparable in those regards, and NextEra looks cheaper right now.
Management says it expects 12% to 15% per year growth in its distribution off of 2019's fourth quarter base, through at least 2024. That seems achievable as it plans to maintain a payout ratio of about 70%.
For conservative investors who want to participate in renewable energy's growth in 2021, NextEra Energy Partners is a good value, with an almost 3% dividend yield that will grow at a high rate for at least several more years.
Renewables from a surprising source
Jason Hall (Phillips 66): Frankly, so many renewable energy stocks have run so much over the past year, it's getting more and more challenging to find what I consider reasonable prices. Don't get me wrong -- I love so many renewables companies. I just don't love the prices investors have been willing to pay lately, despite how much my own portfolio has been a beneficiary of this incredible run.
Which leads me to a traditional oil and gas company that is a great under-the-radar bet on both the future of renewables and the continued importance of oil and natural gas for, very likely, many years to come: Phillips 66.
Phillips 66 is a refining powerhouse, with some of the most advanced refineries on earth. That sets it up for a great 2021, as energy demand returns to normal after the pandemic, and it leverages its technical capabilities to earn above-average margins. But looking beyond oil, Phillips 66 is one of the first refiners to prioritize renewable fuels from its refineries, using human-derived waste products as feedstocks for diesel. The environmental benefits of this application are notable, consuming products that would normally enter the waste stream and converting them to low-carbon fuels that work in existing vehicles. It has also taken steps to begin producing hydrogen -- historically produced from natural gas -- from renewable energy sources, and is deploying solar at its refineries to reduce its own carbon footprint.
A company that's built to supply today's energy needs as well as play a role in the clean energy transition deserves a look. With shares still more than 40% below all-time highs, and a sustainable dividend yielding 5% at recent prices, Phillips 66 is also a bargain, while most renewable energy stocks trade for nosebleed valuations.
Renewable energy is here to stay
As an asset class, renewable energy is booming around the world and is now less costly to build than fossil fuel plants, on a basis of cost per unit of energy output. That'll give a lot of tailwinds to the industry and is why we think SunPower, NextEra Energy Partners, and Phillips 66 have a lot of growth ahead in 2021.