The energy transition to renewables is one of the biggest investing megatrends of our generation. The global economy needs to invest trillions of dollars over the coming decades to build out renewable energy and storage capacity and drive the extinction of carbon-emitting fossil fuels.
Despite that massive opportunity, some of the fastest-growing renewable energy investors have been in a bear market over the past year. Brookfield Renewable (BEPC -0.43%) (BEP -1.02%) and NextEra Energy Partners (NEP -1.38%) are both down more than 20% from their high. That makes them look like extremely compelling investment opportunities, given the colossal growth ahead as we enter what could be a big bull market run for renewable energy stocks.
1. Adding power to the bull thesis for NextEra Energy Partners
Shares of Brookfield Renewable and NextEra Energy Partners are down sharply despite one of the biggest catalysts to hit the sector in years. Last year's passage of the Inflation Reduction Act is "transformational for our industry and business," according to John Ketchum, the CEO of NextEra Energy Partners and its parent NextEra Energy (NEE 0.53%). He noted that the legislation supports clear incentives for a broad array of renewable energy technologies that will be in place for a long time. Because of that, it should "help NextEra Energy and NextEra Energy Partners continue to drive long-term value for our customers and our shareholders and unitholders."
The legislation gave NextEra Energy Partners the confidence to extend its growth outlook through 2026. The clean energy infrastructure company expects to grow its dividend, which yields 5.3% following the sell-off in its shares, at a 12% to 15% annual rate through at least 2026. That powers the company's view that it can generate significant returns for investors in the coming years:
Image source: NextEra Energy Investor Relations Presentation.
NextEra Energy Partners has several power sources to drive earnings and dividend growth. The biggest one is drop-down transactions with NextEra Energy. The large-scale utility has an extensive and growing portfolio of renewable energy assets it can sell to its affiliate. Those sales enable NextEra Energy to recycle capital into new developments while allowing the partnership to grow its cash flow to support a rising dividend. In addition, the company can acquire assets from third parties and invest in organic expansion projects.
2. Powerful long-term growth drivers
Brookfield Renewable operates a globally diversified renewable energy business. The company has several drivers that should power strong growth in the coming years:
Image source: Brookfield Renewable Investor Relations Presentation.
As that slide shows, the company could grow its funds from operations (FFO) by as much as 20% annually through 2027. That easily powers Brookfield's plan to increase its 4%-yielding dividend by a 5% to 9% annual rate.
One power source is the company's extensive and growing development pipeline. Brookfield has over 110 gigawatts (GW) of renewable power projects in various stages of development, enough to supply all of Canada's home electricity needs for a year. It has 19 GW under construction or in advanced stages of development, giving it line of sight for future growth. A sizable portion of those projects is in the U.S. after the company agreed to invest up to $2 billion into renewable energy developers Scout Clean Energy and Standard Solar last year.
Meanwhile, the company is expanding its platform to Australia through its investment in acquiring Origin Energy (ORG -0.61%). The transaction will provide Brookfield with steadily rising income. It will help lead that company's decarbonization in the coming years by building additional renewable energy and storage capacity to retire Origin's large-scale coal-fired power plant. Acquisitions like that will help power high-end growth for Brookfield, which should drive strong total returns when combined with its high-yielding dividend.
Mammoth growth ahead
Brookfield Renewable and NextEra Energy Partners expect to grow by as much as a 20% annual rate over the next few years. The immense need to invest in building out additional renewable energy capacity is powering that prodigious growth forecast. That should enable both companies to invest significant capital that can earn outsized returns, which should power above-average earnings and dividend growth. This catalyst positions them to produce powerful total returns as the next bull market in renewable energy begins.
