The energy transition presents economic and environmental opportunities for the public and private sectors. Whether it's lowering emissions for legacy industries and existing processes or implementing new technologies that can support a lower carbon future, there is a heightened focus on sustainable growth and environmental, social, and governance investing.
NextEra Energy (NEE 0.45%), Johnson Controls International (JCI -0.17%), and Brookfield Renewable (BEP 0.92%) (BEPC 0.81%) are three quality dividend-paying companies with prospects that are aligned with the energy transition.
Image source: Getty Images.
Improved profitability is the key for NextEra Energy
Daniel Foelber (NextEra Energy): Last Friday, NextEra Energy reported another excellent quarter. The regulated electric utility posted 13% growth in adjusted earnings per share (EPS) in the third quarter versus a year ago.
The company has two main business units. Florida Power & Light (FPL) is the legacy business that supports more than 12 million folks across Florida. That unit alone made over $1.07 billion in net income for the quarter. Meanwhile, NextEra Energy Resources (NEER) is the company's (mostly) renewable energy arm. It finances and operates utility-scale projects across North America. NEER's profitability has improved over the years. It made $722 million in adjusted earnings for the quarter.
NextEra Energy has grown to become the largest renewable energy operator in North America, mainly by using excess free cash flows from FPL to fund NEER's development. It's worth noting that FPL is also investing in solar to shift its energy mix away from natural gas. But NEER's improved profitability is an excellent sign that the business unit is becoming self-sufficient.
Over time, NEER's profitability should help NextEra Energy pay down debt and fund future dividend raises. Having paid and raised its dividend for 28 consecutive years, NextEra Energy is a Dividend Aristocrat with a proven track record of returning value to shareholders.
NextEra Energy is also a reliable business that is able to accurately forecast performance multiples years into the future. For the full year 2022, it is guiding for adjusted EPS of $2.80 to $2.90. For 2023, it expects adjusted EPS of $2.98 to $3.13 followed by $3.23 to $3.43 in 2024 and $3.45 to $3.70 in adjusted EPS in 2025. It also expects to grow its dividend by 10% per year through at least 2023 and 2024. NextEra Energy remains a well-rounded utility stock with a nice blend of growth and reliable passive income from its 2.3% dividend yield.
Long-term growth prospects are excellent for Johnson Controls
Lee Samaha (Johnson Controls): Around 50% of carbon emissions come from the built environment, including 27% from building operations. Building owners and operators must invest in their properties to meet their net-zero emissions goals. That's the driving force behind the case for buying Johnson Controls stock.
The company has a multiyear opportunity to benefit from a cycle of retrofit investment by building owners. And the global pandemic has created an increased awareness of the need for adequately ventilated, healthy, clean buildings. Throw in the dramatically increased gains in building efficiency from using digital technology to manage structures' operations better, and it's not hard to see why building owners are likely to invest.
This speaks to an opportunity for Johnson Controls to grow sales of its heating, ventilation, air-conditioning, building controls, and fire & security products. Indeed, a quick look at revenue and order trends across its industry in 2022 confirms how vital the industry is now.
That said, Johnson Controls did disappoint investors earlier in the year. It's not that orders and backlog growth aren't firm; it's more the case that management was too optimistic over its ability to overcome supply chain pressures. For example, the company found it challenging to execute on its backlog of higher-margin building controls, given an undersupply of semiconductors.
Still, those supply chain pressures will likely ease, and the company's long-term prospects look good. Throw in a 2.8% dividend yield, and the stock is attractive for income-seeking investors.
A powerful path to pocketing some passive income
Scott Levine (Brookfield Renewable): While some companies dip their toes in low-carbon initiatives, Brookfield Renewable is fully immersed. The business includes more than 6,000 power-generating facilities in its portfolio of assets that represent a variety of renewable energy sources: solar, wind, hydropower, and energy storage.
Located around the globe, these assets account for about 24 gigawatts (GW) of generating capacity. For income investors interested in exposure to companies that will prosper from the growing push toward low-carbon power sources, Brookfield Renewable (with a forward dividend yield of 4.2%) is a worthy consideration.
Management's commitment to rewarding investors is undeniable. Since its start in 2000, Brookfield Renewable has increased its distribution to unitholders at a 6% compound annual rate, from $0.38 per unit in 2000 to $1.28 per unit in 2022.
And it's likely that the distribution will continue powering higher for the foreseeable future. Brookfield Renewable consistently articulates a target of annual distribution growth of 5% to 9%. Skeptics might question whether management's dedication to shareholders is jeopardizing the company's financial well being, but the fact that the company has an investment-grade credit rating of BBB+ from Fitch Ratings should allay those concerns.
Brookfield Renewable has a robust pipeline of projects -- about 62 GW of generating capacity -- to support future growth. From 2021 to 2026 alone, management expects to increase its portfolio by 3% to 5% from those projects in its pipeline, additions that will help the company to grow its funds from operations by about 10% per unit.
But growth isn't solely coming from organic sources. Brookfield recently demonstrated its interest in acquisitions with the announcement that it plans on partnering with Cameco to acquire Westinghouse Electric, a global leader in nuclear services.
