I do not own a pure-play clean energy investment, which is a purposeful decision. I know the sector is important, and that clean energy will, over time, displace carbon-based fuels to a large degree. However, investor sentiment is so hard to handicap that I'd rather own a company that can use a strong foundational business to fund its investments in a new area. That's exactly why I think of Canada's Enbridge (ENB 0.20%) as a clean energy play. Let's dig in here.
The big picture
I'm a dividend investor, so anything that doesn't provide at least some income via dividends is out. That limits the clean-energy universe a little bit. Next, I prefer companies that have proven their long-term commitment to paying dividends. I'm particularly fond of names that have long histories of annual dividend hikes behind them. Since the clean energy sector is kind of new, even more names fall off the list.
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What I'm left with are Brookfield Renewable Partners (BEP 2.85%), utilities (which I also own, but for different reasons), and oil-focused Enbridge. I own TotalEnergies (TTE 0.52%), even though it lacks dividend growth, but like utilities, there's a different reason for that (it's my energy commodity play, with a clean-energy twist, but more on why it's different from Enbridge in a second). While I'm fond of Brookfield Renewable Partners, Enbridge's 6% yield is roughly twice as large, and the Canadian pipeline company has increased its dividend for more than 25 consecutive years. It's a Dividend Aristocrat, and that holds a lot of weight with me.
Brookfield Renewable Partners has a good dividend streak going but it's more than a decade away from Aristocrat status. Brookfield is a fine investment, but it's an all-in bet on clean energy, and I think there's still a lot of life left in oil and natural gas. So why not own a company like Enbridge that uses its carbon business to help self-fund its small but growing clean-energy operation?
What Enbridge does
So what does Enbridge actually do? The vast majority of its business is fee or contract-based. Unlike TotalEnergies, where the top line is tied to energy prices, Enbridge's cash flows are driven by demand for these fuels and are, thus, more stable over time. Roughly 58% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from oil pipelines. This business is expected to shrink over time as Enbridge invests in other areas, but the cash flows it provides will be vital to its investment plans. It is the foundation.
About 38% of its EBITDA comes from natural gas pipelines and a natural gas utility business. Natural gas is a carbon fuel, but it's being used to help shift the world away from dirtier options like coal. So it is helping the transition. And, like it or not, the world still needs carbon fuels, so somebody has to help transport them. Better it should be a large and reliable name like Enbridge.
The remaining 4% of EBITDA comes from Enbridge's renewable power investments. That's tiny, but it's up from 3% just a few years ago. Going from 3% to 4% is a massive amount of growth. Of the roughly $9 billion in spending the company has planned over the next few years, roughly a third is earmarked for clean energy. Step back and think about that for a second -- Enbridge is dedicating a third of its capital spending plans to a business that only makes up 4% of EBITDA. Clean energy is clearly a priority.
The big investments here are a trio of offshore wind farms in Europe, which will come online over the next three years. But Enbridge is also investing in solar power projects to provide electricity for its pipeline assets. It is also looking at renewable natural gas, hydrogen, and carbon capture technology, among other things. Those three big offshore wind projects, meanwhile, give it ample time to find sizable new investments to make in the longer term.
A realistic pick for an evolving energy industry
Every stock comes with warts, which is true even of focused clean-energy plays. Mercurial investor sentiment has been one of the most notable negatives in this sector over the past year or so. I'm much happier looking at the world as it is (still needing vast amounts of carbon fuels), considering where it is slowly going (at a snail's pace shift toward clean energy), and finding a name like Enbridge that has capably straddled the divide between the two. Oh yeah, and it pays me very well for owning it.
