The global economy has been slowly shifting toward cleaner fuel sources over the years. This transition will likely take several more decades to complete. However, what has become clear is that the world is moving toward a renewable energy-powered future.
Many companies are taking early steps to participate in the energy transition. Three energy companies positioning themselves to win are Royal Dutch Shell (RDS.A)(RDS.B), Xcel Energy (XEL 0.16%), and NextEra Energy (NEE -0.76%). Here's why investors won't want to miss this trio.
The royal treatment
Reuben Gregg Brewer (Royal Dutch Shell): Royal Dutch Shell cut its dividend in 2020 in the face of low energy prices. That's not good. But it would be a mistake to count this nearly 200-year-old energy giant out, given its long history of adjusting its business along with the world around it.
Today that means pulling back in the carbon-heavy oil space, investing more heavily in transition businesses (like liquified natural gas, which is often paired with renewable power to ensure energy reliability), and increasingly focusing on the future of energy (such as renewable power, which the company calls a "growth" business). The dividend cut, while unfortunate, helps free up cash to fund the transition of its business, with Shell planning to invest as much as $20 billion a year to meet the world's changing energy needs. The key, however, is that going forward only 35% to 40% of the capital spending budget is earmarked for oil. The rest is split between its transition and growth businesses. This is a fairly aggressive plan that will work out particularly well if the world makes a decided shift toward renewable power.
To be fair, conservative dividend investors might prefer a more middle-of-the-road approach, like the one Total is taking. But if you believe that the renewable power transition will happen quickly, Shell appears to be in a better position to transition to the clean energy future while milking its cash cow oil business for as long as it can manage.
Investing in the future of energy
Matt DiLallo (Xcel Energy): Utility Xcel Energy has a bold goal. It aims to deliver 100% carbon-free electricity by 2050. Fueling that plan is a steady transition to cleaner power sources. The company intends to retire all its coal power plans by 2030 and replace that capacity with cleaner natural gas and renewable energy. Meanwhile, it's investing in emerging technologies like green hydrogen to achieve its ambitious multi-decade plan to produce emission-free energy.
In the near term, Xcel Energy expects to invest as much as $24 billion through 2025 on expansion projects, such as new renewable energy capacity. That's a $1.4 billion increase from its initial plan, powered by incremental investments in new solar energy developments and wind repowering projects. In addition to that visible near-term growth, the company sees significant future expansion opportunities in solar due to steadily falling costs and intriguing potential for using nuclear energy to produce emissions-free hydrogen that could eventually become a replacement for natural gas.
The company anticipates its investments over the next four years will power earnings-per-share growth of about 5% to 7% annually. That should give it the fuel to increase its 2.7%-yielding dividend by around that same yearly rate. Xcel's steadily rising earnings and dividends should produce attractive total returns for investors, especially considering the company's low-risk profile. That combination of low risk and attractive reward potential makes Xcel a great way for investors to earn some green as the world goes green.
A win-win stock for all investors
Neha Chamaria (NextEra Energy): If you're looking to invest in renewables, look no further than NextEra Energy. It is, after all, the world's largest producer of energy from solar and wind. But here's the real deal: The company, which also owns the largest regulated utility in the U.S., Florida Power & Light Company, is going all out to ensure it remains right at the top in coming years, and that's precisely why investors could mint a lot of money from this stock.
NextEra had a solid year in 2020, beating COVID-19 pandemic blues and delivering where it matters. As the company's earnings grew, so did its projections through 2023. NextEra foresees its adjusted earnings per share growing 6% to 8% in 2022 and 2023 off its projected 2021 base, backed by an ever-growing renewables portfolio.
Through the first nine months of 2020, NextEra added nearly 4,800 megawatts to its renewables backlog. With that, its total backlog crossed 15,000 megawatts by the third quarter, surpassing the company's entire existing renewables capacity. Put another way, NextEra's capacity to produce energy from wind and solar is set to grow exponentially in the near future. With the company also dabbling in battery storage and high-potential green hydrogen, opportunities are numerous.
So you have an established utility here that's taking the renewable world by storm, making NextEra Energy a no-brainer stock to play the renewable energy boom. In fact, growth and income investors alike should be richly rewarded, as NextEra is also an excellent dividend-paying company. Although the stock's yield of 1.7% is on the lower side in the utilities sector, management is targeting 10% annual dividend growth through "at least" 2022. With NextEra's full-year 2020 earnings just around the corner and its next dividend hike expected in coming weeks, you won't want to miss this train.