Energy stocks are in a state of flux early in 2021. Traditional oil and gas companies are looking at a potential future of declining demand as electric vehicle (EV) sales increase. But on the renewable energy side, wind and solar stocks that are taking market share are trading at nosebleed levels.
As investors balance this risk/reward dynamic, one company stands out as having macro tailwinds while offering a reasonable valuation for investors: Brookfield Renewable Partners (BEP 2.85%), the owner of hydro, wind, solar, and energy storage assets.
Image source: Getty Images.
Where Brookfield Renewable Partners sits in renewable energy
Brookfield Renewable Partners isn't a manufacturer or technology company or renewable power plant developer; it simply owns renewable energy assets and aims to generate a return on them. It uses some of the cash it generates to pay a dividend, which currently yields 4.3%, and uses the rest to reinvest in projects and grow the business.
The role the company plays in renewable energy is more important than it may seem. Manufacturers and customers need someone to finance the long-term cash flows that renewable energy projects generate, and that's exactly what Brookfield Renewable Partners does.
What's unique about the renewable energy power-plant business is that there isn't a lot of operational risk. On average, power plants that Brookfield Renewable Power owns have a 15-year power purchase agreement with a utility or other customer. This gives the company predictability and ensures the dividend keeps on coming.
Tailwinds in energy
There are a few things to like about the renewable energy industry that Brookfield Renewable Partners is investing in. First, it is growing more quickly than other parts of energy, vastly outpacing fossil fuels.
U.S. wind energy production data by YCharts.
Also keep in mind that there could be even more demand ahead. Many corporations, states, and municipalities are pledging to use 100% renewable energy in the next decade or two, which will keep demand high just because of those mandates.
While mandates and subsidies are great, the biggest reason to be excited about growth in renewable energy is that it costs less to build a wind or solar power plant in most parts of the world than to build a coal or natural gas power plant. Renewable energy is the smart economic move, and that will give Brookfield Renewable Partners plenty of places to invest.
A growing pool of assets
Brookfield Renewable grew up as a hydro power plant owner, and it's diversified into more wind and solar projects the last few years. But that's not where its diversification will end.
The company is starting to invest more in energy storage, a growth market within energy. Everything from batteries for utility-scale power plants to batteries in homes will need financing, and that's where Brookfield Renewable Partners can play a role.
On the horizon, we could also see hydrogen be part of the company's future. Electrolyzers to manufacture hydrogen from water and hydrogen-powered fuel cells could be a major growth market over the next decade, and if so, the financing Brookfield can provide will be important.
Growth and safety in energy
Brookfield Renewable Partners has a great combination of growth potential in the booming renewable energy industry as well as safety from the 4.3% dividend yield and 15-year average power purchase agreements. That's why this is my top energy stock for February, and it's the kind of stock that has a place in any portfolio.
