Clean energy production like solar and wind power is growing rapidly as the world seeks to verify the progress of global warming. But this transition will take decades, and demand for oil and gas is expected to increase in absolute terms by 2024, even as their share of the total energy pie shrinks as energy demand increases. Perhaps the best way to invest in energy today is to find a company with a strong core that is also preparing for the future, like NextEra Energy (NYSE: NEE), Enbridge (NYSE: ENB), Where Royal Dutch Shell (NYSE: RDS.B).
1. The half-and-half giant
The basis of NextEra’s business is its portfolio of regulated utilities. Much of it is Florida Power & Light, the largest electric utility in the United States. He also owns other utility assets in the Sunshine State.
The big story of this business is slow and steady growth. It comes from the continuous migration of people, which means more customers. And this comes from the tariff increases that are justified to regulators by the capital expenditures required to maintain high levels of utility performance. In 2022, NextEra will work to complete a multi-year, $ 30 billion capital investment plan in this company.
On the other side of the business, the company claims to be the largest producer of solar and wind power in the world. It currently has 26 gigawatts of electrical capacity, most of which is… solar and wind. However, it plans to build up to 30 gigawatts more by 2023, more than doubling its already giant size. Most of these energies will again be solar and wind, but energy storage is also starting to gain importance. This will likely require as much expense as NextEra in its regulated business.
Overall, the company expects earnings growth of between 6% and 8% through 2023, with dividends likely to rise by around 10% or so. This is impressive for a utility. The stock isn’t cheap and the return is around 1.8%, but for growth and income investors it’s still worth a close look.
2. Collection of fees
Enbridge’s business model is based entirely on toll collection. For example, its oil and gas pipelines, which accounted for around 83% of its earnings before interest, taxes, depreciation, and amortization (EBITDA), are intermediate paying assets where the company is largely paid for the use of the pipes. regardless of commodity prices. About 14% of EBITDA comes from a regulated natural gas distribution company. And the rest, just 3%, is spent on renewable energy which is sold under long-term contracts. The latter is quite small, but the goal is to use carbon companies to finance the growth of clean energy operations over time.
This brings us to Enbridge’s capital spending plans. As it stands, the North American mid-sector giant is targeting 16% of its investment spending towards the clean energy portion of its business. It’s well over the 3% of EBITDA that clean energy represents, and that includes a number of large offshore wind projects in Europe. But these outsized expenses are expected to lead this business to grow bigger over time, even as carbon-based businesses continue to throw in huge amounts of money. In particular, Enbridge expects to have over $ 2 billion in cash flow in 2022 that it will need to find housing for, which could include share buybacks, so it won’t have any issues. to find the money for this effort, and may even increase this over time. Meanwhile, income-oriented investors can collect a hefty 6.6% dividend yield as management works, slowly, to update themselves with the world around them.
3. Back on the path to dividend growth
NextEra and Enbridge are both dividend aristocrats, having increased their dividends each year for more than 25 consecutive years. Shell cut its dividend in early 2020, which has been a terrible year for the integrated oil giant due to the coronavirus pandemic (it was hardly alone). However, around the same time as the dividend cut, the company also announced plans to shift its focus to clean energy, using dirty energy operations as a source of funding. The cut was basically a way to reset things. Part of that reset, meanwhile, was a plan to go back to regular dividend increases again.
As might be expected, Shell’s business is still heavily dependent on carbonaceous fuels. But it is increasingly making commitments to clean energy while divesting its oil and gas business, allowing it to keep its operational promise. And he’s now increased the dividend three times since the cut, so he’s also meeting his dividend targets. At 3.6%, Shell has the lowest yield of its closest competitors, but if you’re looking for a way to benefit from high demand for oil and renewables, this is a built-in option. leading.
Not dead yet, and you take advantage
It seems like ESG enthusiasts want the global electricity markets to be like a light switch, where you could just flip it and we would all be using clean energy. It’s not possible, but smart companies with their feet in the carbon economy are now starting to prepare for the eventual shift to clean energy. And that’s the kind of long-term energy investment you want to have. NextEra, Enbridge, and Shell provide perfect starting points for your research efforts.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.Source link