The production of clean energy like solar and wind is growing fast as the world looks to check global warming's progress. But this transition will take decades, and oil and gas demand is expected to increase on an absolute basis by 2024 -- even as their share of the total energy pie shrinks -- because energy demand is growing. The best way to invest in energy today may be to find a company with a solid core that's also building for the future, like NextEra Energy (NEE -1.23%), Enbridge (ENB -0.05%), or Royal Dutch Shell (RDS.B).
1. The half-and-half giant
The foundation of NextEra's business is its regulated utility portfolio. That's largely made up of Florida Power & Light, the largest electric utility in the United States. It also has some other utility assets in the Sunshine State as well.
The big story for this business is slow and steady growth. That comes from the ongoing migration of people, which means more customers. And it comes from rate increases that are justified to regulators by the capital spending needed to maintain high levels of utility performance. In 2022 NextEra will be working to complete a $30 billion multiyear capital investment plan in this business.
On the other side of the business, the company lays claim to being the largest producer of power from solar and wind in the world. It currently has 26 gigawatts of power capacity, most of which is ... solar and wind. However, it has plans to build as much as 30 gigawatts more by 2023, more than doubling its already giant size. Most of that will again be solar and wind, but energy storage is starting to grow in importance as well. That's likely to require as much spending as NextEra is undertaking at its regulated business.
All in, the company expects to grow earnings between 6% and 8% through 2023, with dividends likely to advance by around 10% or so. That's impressive for a utility. The stock isn't cheap, and the yield is a miserly 1.8% or so, but for growth and income investors it is still worth a close look.
2. Collecting fees
Enbridge's business model is all about collecting tolls. For example, its oil and natural gas pipelines, which made up roughly 83% of its earnings before interest, taxes, depreciation, and amortization (EBITDA), are fee-based midstream assets where the company largely gets paid for the use of the pipes regardless of commodity prices. Roughly 14% of EBITDA comes from a regulated natural gas distribution business. And the rest, a scant 3%, is devoted to renewable power that gets sold under long-term contracts. That last one is pretty tiny, but the goal is to use the carbon businesses to fund the growth of the clean energy operations over time.
That brings us to Enbridge's capital spending plans. As they stand right now, the North American midstream giant is targeting 16% of its investment spending toward the clean energy portion of its business. That's far in excess of the 3% of EBITDA clean energy represents, and it includes a number of large offshore wind projects in Europe. But that outsize spending should lead this business to become more important over time, even as the carbon-based businesses continue to toss off huge amounts of cash. Notably, Enbridge expects to have an excess $2 billion in cash flow in 2022 that it will have to find a home for, which could include stock buybacks, so it won't have any problem finding the money for this effort, and may even augment it over time. Meanwhile income-focused investors can collect a fat 6.6% dividend yield while management works, slowly, to update with the world around it.
3. Back on the dividend growth path
Both NextEra and Enbridge are Dividend Aristocrats, having increased their dividends annually for more than 25 consecutive years. Shell cut its dividend at the start of 2020, which was a terrible year for the integrated oil giant because of the coronavirus pandemic (it was hardly alone). However, at roughly the same time as the dividend cut, the company also announced plans to shift its business toward clean energy, using the dirty energy operations as a funding source. The cut was basically a way to reset things. A part of that reset, meanwhile, was a plan to get back to regular dividend increases again.
Shell's business is still heavily reliant on carbon fuels, as you might expect. But it is making larger and larger commitments to clean energy while divesting oil and gas businesses, so it is making good on its operational promise. And it has now increased the dividend three times since the cut, so it is also making good on its dividend objectives as well. At 3.6%, Shell has the lowest yield of its closest peers, but if you are looking for a way to benefit from strong demand for both oil and renewables, this is a leading integrated option.
Not dead yet, and you get to benefit
It seems like ESG devotees wish that global power markets were something of a light switch, where you could just flip it and we'd all be using clean energy. That's not possible -- but astute companies with their feet in the carbon economy are starting to prepare for the eventual shift toward clean power now. And that's the kind of long-term energy investment you want to own. NextEra, Enbridge, and Shell offer perfect starting places for your research efforts.