The energy industry has been one of the few that have held up well through the market's collapse over the last 18 months. Companies have benefited from higher commodity prices, and management teams have been less eager to expand for the sake of expansion, which torpedoed margins in the mid-2010s.
Not every energy stock is a great buy today, but a few stick out. First Solar (FSLR -0.44%) is a leading solar manufacturer, Brookfield Renewable Partners (BEPC 0.87%) sports a 4.6% dividend yield, and ConocoPhillips (COP -0.16%) is a highly profitable oil and gas company. Here's why I love these three diverse energy stocks.
1. First Solar is a growth stock again
Operational momentum couldn't be stronger for First Solar. The company entered 2022 with 21.4 gigawatts (GW) of backlog demand to fulfill, and by the end of February 2023 that figure had more than tripled to 67.7 GW. In addition to higher demand, the company is increasing capacity from 9.8 GW in 2022 to 20.1 GW in 2024, with new plants in the U.S. and India coming online.
There are a number of tailwinds helping First Solar achieve this growth. One is a better policy environment in the U.S., where the company is the biggest solar panel manufacturer by a wide margin. But the other is improving efficiency and costs compared to commodity suppliers.
Management expects net sales to be $3.4 billion to $3.6 billion this year, with gross margin reaching 35% or higher. This is not only a growth stock in renewable energy, it should be even more profitable as it scales operations.
2. Brookfield Renewable and its growing dividend
One of the critical components of the renewable energy industry is financing. Without someone to pay for a project, it doesn't matter how good or low-cost the equipment is. That's where Brookfield Renewable Partners comes in as one of the most prominent financiers in the industry.
The company generated $1 billion, or $1.56 per share, in funds from operations in 2022. That's an increase of 8% from a year ago, and growth should continue. Brookfield Renewable has 19 GW of assets under construction and a pipeline of 110 GW.
The company uses a portion of its funds to pay down debt and acquire growth assets. But the goal is to grow the dividend 5% to 9% per year long-term, and the current 4.6% dividend yield will grow as a result. In the renewable energy asset business, this is a leader and a stock to hold for a very long time.
3. ConocoPhillips is a cash machine
The oil and gas business has changed a lot over the last decade. The shale boom led to a bust and hundreds of billions of dollars in losses for investors. At the same time, electric vehicles and renewable energy have grown in popularity, showing fossil fuel producers that the days of growing demand may soon come to an end.
As a result of these trends, companies pulled back on spending, despite high oil prices, and are happily generating record amounts of cash. You can see below that operating income and cash flow are higher than they've been in a decade, and that doesn't look like it'll stop anytime soon.
COP Revenue (TTM) data by YCharts
ConocoPhillips is now a cash machine in the energy industry, and that will allow management to buy back cash or pay dividends to shareholders. Higher interest rates and more stringent investor demands for returns are having a positive impact on oil and gas companies, and this is one that I think has a bright future as a result.
The future of energy
These companies are all industry leaders in energy, and they'll generate value for shareholders for a long time. Whether it's growth or dividends, there's a lot to like for shareholders.
