By Alex Kimani
The average U.S. investor has been giving the energy sector a wide berth over the past half a decade due to perennial underperformance. Indeed, the energy sector has been a disaster for long-term investors, emerging as the worst performer among the market’s 11 sectors over the past decade.
Yet, that blanket condemnation ignores the fact that several corners of the energy market, including energy utilities and renewable energy, have been outliers in this sea of mediocrity.
Utility stocks can help stabilize a portfolio by lowering volatility and risk thanks to the fact that the sector is heavily regulated. Utilities tend to be more resistant to economic cycles than most other sectors of the economy because the demand for utilities does not vary much. Most utilities have predictable cash flows, which enables many to pay decent dividends with higher yields than other fixed-income investments.
Utility companies tend to be slow-growing but high-yielding and inexpensive relative to earnings. They are generally viewed as good defensive plays because of their relatively steady and safe cash flows both in both good and poor economic cycles. Utilities are more recession-proof than most sectors, as evidenced by their positive returns during the last recession when the rest of the market tanked.
By the same token, utilities can be a drag on your portfolio during good times. The S&P 500 Utilities Index has gained 25.8% over the past three years compared to 39.3% return by the S&P 500 over the timeframe. For perspective, putting $20,000 in the Utilities SPDR ETF (XLU) over the last three years would have resulted in $2,700 lower profit before fees compared to the same amount invested in the S&P 500 ETF Trust (SPY).Related: Oil Majors Poised To Make Biggest Geothermal Investments In 30 Years
Still, energy utilities are great defensive plays that you should include in your portfolio.
Here are the sector’s best-in-breed stocks.
#1. Brookfield Renewable Partners LP
At a time when energy MLPs (Master Limited Partnerships) are mostly struggling, it comes as a breath of fresh air to find some that are flying high.
Brookfield Renewable Partners LP (NYSE: BEP) is an MLP that owns a portfolio of wind, solar, hydroelectric, and other green-energy properties.
Recently, Plug Power (NASDAQ:PLUG) announced an agreement to source 100% renewable energy supplies from Brookfield Renewable Partners to fully energize its planned green hydrogen production plant, one of the first industrial-scale facilities in North America. The hydrogen sector is one of the hottest corners of the renewable energy sector right now, with the hydrogen market projected to hit $11 trillion over the next three decades.
This makes Brookfield Renewable Partners LP– a 60%-owned renewable-energy affiliate of Brookfield Asset Management–one of the best stocks to own under a Joe Biden presidency.
#2. NextEra Energy Inc.
NextEra Energy Inc. (NYSE:NEE) is a Florida-based clean energy company and America’s largest electric utility holding company by market cap. NEE is the world’s largest producer of wind and solar energy, with 45,900 megawatts of generating capacity. The company owns eight subsidiaries, with the largest, NextEra Energy Services, supplying 5 million homes in Florida with electricity.
It’s worth noting that last year, NextEra briefly surpassED ExxonMobil (NYSE:XOM) to become America’s largest energy company, an ominous warning that renewables are ready to take over the mantle from their fossil fuel brethren.
Last year, NextEra’s management reiterated its 30×30 goal to install more than 30 million solar panels, or roughly 10,000 megawatts of incremental solar capacity, in Florida by 2030 through one of its subsidiaries, Florida Power & Light (FPL).
NextEra is unabashedly pro-renewables: Company CFO Rebecca Kujawa has even declared that the company is “…particularly excited about the long-term potential of hydrogen” and discussed plans to start a pilot hydrogen project at one of its generating stations at Okeechobee Clean Energy Center owned by its subsidiary, Florida Power & Light (FPL).
NextEra’s usual modus operandi involves conducting small experiments with new technologies to establish their cost-effectiveness before going big if the trials are successful.
CFO Kujawa told analysts:
“Based on our ongoing analysis of the long-term potential of low-cost renewables, we remain confident as ever that wind, solar, and battery storage will be hugely disruptive to the country’s existing generation fleet, while reducing cost for customers and helping to achieve future CO2 emissions reductions. However, to achieve an emissions-free future, we believe that other technologies will be necessary, and we are particularly excited about the long-term potential of hydrogen.”
NextEra plans to test the electricity-to-hydrogen-to-electricity model at its natural gas-powered Okeechobee Clean Energy Center that came online in 2019. Okeechobee is already regarded as one of the cleanest thermal energy facilities anywhere on the globe. However, replacing natural gas with zero emissions hydrogen would be a major step in helping the company achieve its goal to become 100% emissions-free by 2050.
Another of NEE’s subsidiaries, NextEra Energy Partners LP(NYSE: NEP), is publicly listed and has been flying, too. NEP acquires, manages, and owns contracted clean energy projects with a preference for businesses with stable, long-term cash flows. NextEra Energy Partners owns interests in dozens of wind and solar projects in the United States., as well as natural gas infrastructure assets in Texas. These contracted projects use leading-edge technology to generate energy from the wind and the sun. The company’s management is shooting for 12-15% dividend growth through 2024, making this an ideal stock for income investors.
#3. American Water Works
American Water Works Inc. (NYSE:AWK) is a New Jersey-based public utility company that provides drinking water and wastewater services to 15 million people in all but four states in the United States. AWK is the largest publicly traded water and wastewater utility in the U.S., which helps the company enjoy stable revenue streams and low demand elasticity, thus enabling the company to pay more consistent higher dividends.
Indeed, whereas water utilities might seem boring, AWK significantly outperformed the S&P 500 over the last 5 years after gaining 158% vs.105%.
This outperformance could continue for years to come.
AWK management has guided for 7-10% EPS and dividend growth through 2024, with the growth runway probably running for much longer. Further, AWK’s proven business model and the rise of ESG investing make it well positioned to continue to deliver for long-term investors.
#4. Edison International
California-based power producer Edison International (NYSE:EIX) is a giant utility that generates electricity through natural gas, hydroelectric, diesel, nuclear, and photovoltaic sources. Edison combines deep value as well as exposure to the decarbonization/electrification trend. Last December, EIX hiked the dividend for a 17th increase and now sports a 4.5% yield.
Southern California Edison, one of Edison International’s subsidiaries, is one of the country’s largest investor-owned utilities, serving 15 million people in Central, Coastal, and Southern California. Based in Rosemead, California, SCE is not only the primary electricity supply company in Southern California, but it has also consistently ranked among the top 10 utilities in the country delivering solar power to its customers since 2007.
On average, the company has been connecting an average of 3,600 solar customers to its grid every month, which works out to a customer coming online every 12 minutes. In 2018, SCE added 547 megawatts of solar energy to the grid, which is the equivalent of removing 231,839 cars from the road for a year.
SCE offers a ‘‘green rate’’ that allows its customer to source all their electricity needs entirely from renewable sources. In 2017, the company commissioned two new hybrid electric-gas peaker plants to accommodate peak demand and also operates a regulated gas and water utility.
#5. AES Corp
The AES Corporation (NYSE:AES) is a Virginia-based, Fortune 500 global power company that provides sustainable energy, including thermal and renewables, to 14 countries. The company owns and manages $34 billion in total assets and generated $10 billion in revenue in 2019. For 2020, the company projected that it derived 36% of its PTC (pre-tax contribution) from the U.S.; 31% from South America, 22% from Mexico and Central America, and the remaining 11% from Asia and Europe.
AES has been making strong progress in its transition to renewable energy and managed to retire 1.2 GW of coal in the U.S. and Chile last quarter, thus bringing its coal generation down to 29% of total output and hitting its target to lower coal generation to below 30% of its total energy output by the end of the year. AES sees coal contributing less than 10% of its total energy output by 2030.
AES has a solid history of raising its dividends over the years, which now sits at 2.2%
By Alex Kimani for Oilprice.com