How to capitalize on the wind energy boom
Renewable energy is a true growth industry. While the fossil fuel industry continues to struggle from the effects of collapsing oil and gas prices, renewable energy is booming. According to the International Energy Agency (IEA), electricity derived from renewable energy sources will see the biggest growth rates through 2020. The IEA points to falling costs and greater demand from emerging markets as the key drivers, and estimates renewable electricity additions will account for two-thirds of additions to global power capacity. By 2020, renewables are projected to account for 26 percent of global electricity supply, up from 22 percent in 2013.
This conclusion is supported by data from the U.S. Energy Information Administration (EIA), which states that total renewables used in electricity generation in the U.S. will grow by 13 percent this year, and another 3 percent next year. One of the subsectors seeing outsized growth is wind power generation. According to the EIA, wind capacity in the U.S. was up 13 percent last year, and is set to grow another 10 percent this year and in 2017. By next year, wind generation is expected to make up 6 percent of total electricity generation.
For investors, the implications are clear: renewable energy could be the next great American growth story.
The next great gold rush
Wind energy, and renewables more broadly, could handsomely reward investors over the long term, because the growth prospects are very attractive. The investing case for renewables makes sense not just economically, but environmentally as well. Energy-related emissions of carbon dioxide decreased 2.8 percent last year, due in no small part to the rise in wind energy. Emissions are forecast to decline another 1.7 percent this year. As carbon emissions fall, consumers will see the benefits of clean energy in action.
As wind energy usage increases, the companies that supply wind energy are sure to profit from the emerging trend. One company investors should be aware of is Brookfield Renewable Partners (NYSE: BEP). It is an especially significant player in wind and has been invested in wind energy projects for a decade.
Brookfield investors have enjoyed steady growth in its share price over an extended period—the stock has returned 30 percent in the past five years. Brookfield has generated a 16 percent compound annual total return since 1999.
And, that’s not even the best part. Brookfield is a premier dividend stock. Brookfield is structured as a limited partnership. In exchange for favorable tax treatment, the company is required to pass along the bulk of its cash flow to investors as a distribution. This results in a sky-high yield. Brookfield has a 6 percent dividend yield, which is very attractive in a low interest rate environment.
Brookfield and its investors are benefiting from the wind energy boom. It owns and operates renewable power generation facilities across North America, Europe, and Latin America. Its corporate history stretches back more than 100 years of experience investing in the energy industry, and it has a high-quality portfolio which includes $25 billion of renewable power assets. Brookfield manages more than 10,000 megawatts of installed capacity. The company currently owns 37 wind facilities across six countries, and growth is just beginning. The company more than doubled its asset base in just the last five years.
Its future growth prospects look very attractive. Brookfield maintains an organic growth pipeline of 3,000 megawatts of capacity. Demand for these projects is very high—approximately 90 percent of Brookfield’s 2016 generation output is contracted to end users including utilities and industrial firms. The agreements for Brookfield’s assets have a weighted-average duration remaining of 17 years, so clearly the long-term picture for wind energy and Brookfield’s growth is very bright.
As its growth accelerates, the company is committed to driving shareholder returns. Management invests in new projects at attractive prices, with a keen eye for finding undervalued opportunities. Brookfield remains focused on delivering 12-15 percent total returns over the long term, along with raising its distributions by 5-9 percent per year.
Analysts are steadily becoming more bullish on Brookfield. In January the stock was upgraded by Desjardins analysts from a hold to a buy rating. As a whole, the six brokerage firms that cover the stock have an average stock price target of $31.50 per share. This is 7.6 percent upside from Brookfield’s June 10 closing price. In addition to Brookfield’s 6 percent dividend yield, the stock could provide investors with an annualized return of more than 13 percent over the next one year.
Companies to watch
Two of Brookfield’s industry peers worth watching are NextEra Energy (NYSE: NEE) and NextEra Energy Partners (NYSE: NEP). NextEra is a diversified utility, and its renewable assets are the most exciting aspect of the company. Its subsidiary NextEra Energy Resources LLC is the world’s largest generator of wind and solar energy.
NextEra Energy Partners is a growth-oriented partnership formed by NextEra Energy. It acquires, owns, and develops clean energy projects with stable long-term cash flow. It primarily owns and operates wind and solar projects in North America. The partnership could be more attractive to investors looking to generate income, as the partnership offers a 4.4 percent dividend yield.
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.