The global economy needs to spend trillions of dollars on decarbonization investments over the next few decades to stave off the worst potential impacts of climate change. That's leading governments worldwide to increase incentives to accelerate the energy transition to lower-carbon sources. Legislation like the Inflation Reduction Act in the U.S. will power a long-term bull market in renewable energy development.
The clean energy investment megatrend should enable companies focused on the sector to grow briskly in the coming years. That rapid expansion should help power strong total returns and enrich investors. Brookfield Renewable (BEP -1.66%) (BEPC -0.89%) and NextEra Energy Partners (NEP -1.49%) stand out for their ability to produce high-powered total returns in the coming years.
A potential acceleration ahead
Brookfield Renewable has been a phenomenal investment over the years. The global renewable energy giant has delivered a 16% annualized total return since its inception over two decades ago. At that rate of return, the company has grown a $50,000 investment into more than $1 million in under 20 years.
That past success is no guarantee of future results. However, Brookfield is in an excellent position to produce total returns as good, if not better, in the future. The company has a quartet of drivers that should power strong growth in its funds from operations (FFO) per share over the next several years:
- Inflation escalation: Brookfield Renewable sells power to utilities and large corporate buyers under long-term, fixed-rate power purchase agreements that index rates to inflation. The company expects steady inflation to drive 2% to 3% annual FFO per-share growth.
- Margin enhancement: As legacy contracts expire, Brookfield expects to sign new ones at higher rates. Margin enhancement activities like that should add another 2% to 4% to its FFO per share each year.
- Development pipeline: Brookfield has over 110 gigawatts of renewable energy projects in various stages of development, enough to power all the homes in Canada for one year. It expects these projects to grow its FFO per share at a 3% to 5% annual rate.
- M&A activities: The company expects acquisitions to grow its FFO per share by up to 9% per year.
Brookfield estimates it can grow FFO at a 10%+ annual rate for the next several years, with an upside potential of more than 20%. This forecast supports the company's expectations it can grow its dividend, which yields 4%, at a 5% to 9% annual rate. That steadily rising income stream and earnings growth could power total returns of 20% (or more) annually if Brookfield grows at the high end of its rate. There's reason to be optimistic it can supercharge growth with acquisitions, given the opportunities ahead in leading decarbonization efforts worldwide. The company would need to deliver a 15.2% average annual return over the next 20 years to grow a $50,000 investment into $1 million.
Powerful returns ahead
NextEra Energy Partners sees the potential of producing prodigious total returns in the coming years:
Image source: NextEra Energy Partners.
As that slide showcases, NextEra Energy Partners expects to grow its cash distribution to partners (which now yields over 5%) by 12% to 15% annually through at least 2026. That could give it the power to produce total returns approaching 20% annually over that time frame. Like Brookfield, it would need to deliver a 15.2% annualized total return to grow a $50,000 investment into $1 million in the next two decades.
The catalyst fueling NextEra Energy Partners' forecast is its ability to steadily acquire income-producing clean energy infrastructure. The company has access to a vast opportunity set thanks to its strategic relationship with leading utility NextEra Energy (NEE 0.51%). That company can sell operating renewable energy assets to its partnership, enabling it to recycle capital into new renewable energy developments. Those deals help grow NextEra Energy Partners' cash flow, giving it the fuel to increase its distribution to investors. In addition to drop-down transactions, NextEra Energy can acquire assets from third parties and invest in organic expansions like repowering existing wind farms by replacing legacy turbines with larger, more powerful ones.
The potential for powerful returns
Brookfield Renewable and NextEra Energy Partners have plugged into the powerful decarbonization megatrend. It should provide them with innumerable opportunities to expand their portfolios of income-generating clean energy infrastructure in the coming decades. That should give them the fuel to grow their already attractive dividends at healthy rates. This combination could give them the power to produce strong total returns, making them great stocks to buy for the long haul.
