The global economy is rapidly transitioning its energy sources to lower carbon solutions. That's opening a massive investment opportunity for companies focused on cleaner energy options. One of the many companies leading this transition is renewable energy and natural gas power generator Clearway Energy (CWEN -0.18%)(CWEN.A).
Add that focus on the energy transition to the recent sell-off in Clearway's stock, and it stands out as one of the most compelling buying opportunities in the energy sector this month.
A better value
Shares of Clearway Energy are down about 25% from their most recent high. That's due entirely to the recent sell-off in high-flying stocks as the market has cooled off from its red-hot run over the past year. Even with the recent decline, Clearway's shares are up nearly 40% since the start of 2020. So, while they're cheaper, they're not the bargain they once were.
Still, with shares now trading at around $27.50 apiece, and Clearway expecting to generate $1.61 per share of cash flow in 2021, it sells for about 17 times cash flow. That's a reasonable level for a financially solid company growing as fast as Clearway is these days. Meanwhile, it's even cheaper based on its expected proforma earnings of $1.80 per share that it should achieve once all its current investments come online.
In addition to trading at a lower valuation, Clearway's sell-off has pushed up its dividend yield to 4.7%. That's well above the 1.5% average dividend yield of stocks in the S&P 500. It's on reasonably solid ground since Clearway's dividend payout ratio currently stands at around 80% of its 2021 cash flow forecast, which is on the low-end of its 80% to 85% target range. Further, the company successfully secured $1.4 billion of financing last year, giving it ample flexibility to continue paying its dividend and fund its growth initiatives.
Lots of growth ahead
Clearway has increasingly visible near-term growth prospects after committing to invest $880 million into new renewable energy opportunities last year. These investments give it a clear line-of-sight on achieving $1.80 per share of cash flow as it closes those deals in the coming months. That gives Clearway increasing confidence that it can expand its already high-yielding dividend at a 5% to 8% annual rate for the foreseeable future, with it anticipating high-end growth in 2021.
Meanwhile, it should have plenty of additional investment opportunities in the coming years to support continued dividend growth. Clearway Energy is already working with its parent, renewable energy project developer Clearway Energy Group, on a co-investment opportunity for a 1.1 gigawatt (GW) to 1.7 GW portfolio of projects it's developing. That's only a small portion of that company's roughly 10 GW development pipeline. On top of those internal opportunities, Clearway can also purchase assets from third-party sellers and organically expand its existing assets.
Clearway Energy should have no shortage of investment opportunities in the coming years. According to one estimate, the energy industry will need to invest $100 trillion over the next 30 years to decarbonize the economy. That's a massive opportunity that could help power steady growth for Clearway in the coming decades.
High-powered returns ahead
While Clearway Energy has cooled off a bit this year, that sell-off looks like a buying opportunity. It now trades at a relatively cheaper valuation and higher dividend yield. Add that to Clearway Energy's growth prospects, and it looks like it could be a winning energy stock as it has the potential of producing double-digit annual total returns in the years ahead. That's why Clearway tops my list of energy stocks to buy this April.