The energy market is undergoing a multi-decade transition to cleaner energy. This megatrend should power growth for companies investing in clean energy in the years ahead.
Enbridge (ENB -1.21%), Brookfield Renewable (BEPC 0.09%) (BEP 0.19%), and NextEra Energy Partners (NEP -0.89%) stand out to a few Fool.com contributors for their investments in cleaner energy. It drives their belief that these energy stocks can make their investors richer in the coming year and beyond.
Enbridge is buying three utilities in 2024
Reuben Gregg Brewer (Enbridge): Canadian midstream giant Enbridge is a bit of an odd duck. While it owns energy infrastructure in both the oil and natural gas spaces, it also owns a natural gas utility and clean energy assets. The big picture is that the company is transitioning its energy business along with the world's shift toward renewable power. But there's a nuance here, because management believes that natural gas will be a key transition fuel.
The problem is that building new natural gas pipelines has become a lot more difficult in recent years, limiting growth opportunities for companies like Enbridge. To adjust, the company just agreed to buy three regulated natural gas utilities from Dominion Energy. These are fairly boring assets, but regulated utilities have predictable investment needs and returns set by regulators. So Enbridge is getting more boring, but it is, at the same time, solidifying its long-term capital investment opportunities.
The three purchases will be staggered throughout 2024, so the year will be something of a transition period. Investors have taken a dim view of the near-term uncertainty that will likely cause, pushing the shares lower and the yield up to a very attractive 7.7%. That said, Enbridge believes it can continue to maintain its financial strength and long-term growth targets after the three utilities have been bought, with more certainty of achieving its goal of 5% growth in earnings before interest, taxes, depreciation, and amortization. The dividend should grow by a similar amount, making this a strong income and growth investment in the energy sector.
Positioned to produce a powerful total return
Matt DiLallo (Brookfield Renewable): Brookfield Renewable has been a very enriching investment over the years. The renewable energy juggernaut has delivered an 11.7% annualized total return since its formation a dozen years ago. That has grown a $1,000 investment into nearly $3,750.
The company's consistent growth has helped power those strong returns. It has grown its funds from operations (FFO) at a more than 10% annual pace since its formation while increasing its dividend at a 6% compound annual growth rate.
Brookfield Renewable could grow even faster in the future. It sees a trio of organic growth drivers (inflation-linked rate increases, margin enhancement activities, and development projects) powering 7% to 12% annual FFO per share growth through 2028. Those organic growth drivers support Brookfield's view that it can grow its dividend by 5% to 9% per year.
Meanwhile, the company believes that M&A activities could add more than 9% to its FFO per share each year. Brookfield has been a very active acquirer this year. It recently closed several deals and has another sizable one in the pipeline. That gives it lots of momentum heading into 2024.
Investors are getting all that growth for a cheaper price. Shares of Brookfield Renewable currently sit more than 25% below their 52-week high. That lower price is a great entry point for this proven wealth creator. With its dividend yield currently over 5% and its business growing at a double-digit rate, Brookfield could produce total annual returns in the mid-teens from here.
A beaten-down stock worth a watch
Neha Chamaria (NextEra Energy Partners): NextEra Energy Partners' shares have been hammered in recent weeks, with the company's decision to slow down its pace of dividend growth through 2026 catching investors off guard. Since NextEra Energy Partners primarily relies on funding to acquire and operate clean energy assets from its parent company, NextEra Energy, higher interest rates made such funding costlier and compelled the company to slash its annual dividend growth target from 12%-15% to a more sustainable 5%-8%.
Yet with the clean-energy stock losing half its value in the past three months and cratering more than 65% this year, the sell-off appears overdone and there's a solid chance NextEra Energy Partners could rebound in 2024. That's because while it's true that the company could face near-term challenges to fund growth, it is already working on its new strategy to support growth and dividends.
Specifically, NextEra Energy Partners will focus on two things to bolster cash flows over the next couple of years or so: repowering its existing wind energy assets for higher productivity and returns, and selling off its natural gas pipeline assets. To start, it has already finalized a deal to sell its Texas natural gas assets to energy infrastructure giant Kinder Morgan for $1.8 billion and has identified 740 megawatts of wind projects to repower.
Let's also not forget that NextEra Energy Partners continues to have NextEra Energy's backing, with the parent even urging investors recently to not "lose sight" of the partnership's underlying portfolio. Highlighting how NextEra Energy Partners is the seventh-largest producer of wind and solar energy in the world, NextEra Energy management remains optimistic about its future and wants the partnership to be successful. With NextEra Energy Partners also confident of growing its annual dividend by around 6% through at least 2026, this beaten-down 14%-yielding stock could be a winner in 2024 and beyond.
