Investing in renewable energy stocks used to be considered risky, but that view has begun to change. Thanks to technological advances, generating clean energy to power our homes and businesses no longer require tax breaks and other government subsidies to be profitable. That's right, for the first time, green energy is now, finally, "in the green."
With economics now on the side of renewable energy, smart investors should start giving more consideration to the shares of companies that focus on creating it.
However, before you dive in, it should be noted that the alternative energy sector is still in its early years, so the risks involved have not entirely dissipated. Among the many renewable energy stocks on Wall Street, only a fraction are worthy of consideration for long-term investors. But three of them -- Brookfield Renewable Partners (BEP -4.15%), Vesta Wind Systems (VWDRY -6.34%), and 8point3 Energy Partners (CAFD) -- are in my view particularly compelling.
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| Company | Renewable Energy Types | Market Capitalization | Dividend Yield |
|---|---|---|---|
| Brookfield Renewable Partners | Hydroelectric, solar, and wind | $5.67 billion | 5.5% |
| Vesta Wind Systems | Wind turbine manufacturing and services | $19.3 billion | 1.63% |
| 8point3 Energy Partners | Solar | $1.09 billion | 7.6% |
Data source: S&P Global Market Intelligence.
Read on for all the key details.
Turning water into gold
Brookfield Renewable Partners owns 215 hydroelectric facilities, 38 wind power assets, four biomass facilities, and a few other renewable energy projects for good measure, spread across North America, Latin America, and Europe. Its capacity currently stands at 10,700 MW, with hydroelectric generation accounting for 88% of the total capacity (and over 90% of cash flow). It also has about 6,000 MW more in the pipeline, spread across 15 power markets.
It distributes the profits from these assets to investors at the direction of Brookfield Asset Management, which owns 61% of it.
Recent results have been strong, with the company's 2016 revenue coming in at $2.45 billion, up significantly from 2015's $1.63 billion. Profit and cash flow figures are difficult to derive judgments on for publicly traded partnerships. True to form for such corporate structures, Brookfield Renewable reported GAAP earnings of just $3 million last year -- obviously, this isn't the whole story.
As is the case with REITs and other publicly traded limited partnerships, the performance and value of this type of business can't be properly gauged by metrics such as GAAP net income -- which is affected by more than just revenue and costs of goods sold. For example, Brookfield Renewable reported a GAAP net loss last year of $21 million, and yet managed to distribute $533 million in dividends, invest $376 million in capital expenditures, and move forward with just under $2.8 billion in acquisitions.
To get a feel for what Brookfield's future might look like, investors need to dig a little deeper. The years ahead do appear bright. The company is seeking to invest at least $500 million to $600 million per year for the foreseeable future in expanding its portfolio, with the goal being to generate annualized returns in the 12% to 15% range. Those aggressive growth plans might make some investors nervous (a business that pays out its profits almost always has to tap the capital markets to grow), but the partnership is conservatively financed ($15 billion in liabilities, backed by $28 billion in assets as of March 31). With a current dividend yield of 5.5% and the tailwind of green energy's rise filling its sails, Brookfield is worth a closer look from investors seeking to profit from renewable energy stocks.
Blowing away the competition
Founded in Denmark in 1945, Vestas Winds Systems is a wind energy company whose business revolves around two segments: project and service. Its project division sells wind power plants as well as wind turbines. Its service unit provides services related to the company's offerings and sells spare parts for installed wind turbines. Vestas is so well regarded in the wind energy subsector that it now has operations in 70 countries across the globe. Its advanced suite of wind-generation options has also translated into incredibly compelling financial results.
Vestas Wind Systems' revenue increased 48% in just two years, growing from 6.91 billion euros in 2014 to 8.42 billion euros in 2015 and 10.23 billion euros in 2016. Profits rose respectably over this period as well, with net income coming in at 392 million euros, 685 million euros, and 965 million euros in 2014, 2015, and 2016, respectively.
Trading at just 16.4 times 2017's earnings estimates, as aggregated by S&P Global Market Intelligence, and paying a dividend that currently yields 1.6%, Vestas Wind Systems is an excellent renewable energy stock for Foolish investors to consider.
21 years of dividend checks
8point3 Energy Partners (named for the 8.3 minutes that it takes the sun's light to reach Earth) is a limited partnership that owns utility-scale solar projects, sells the electricity they generate to utilities and distributes the profits to its investors. You see, 8Point3 is what is known as a yieldco -- a business created by solar panel manufacturers and installers to own and operate large solar projects so that the companies that construct them don't have to keep these multimillion-dollar capital projects on their books for decades. Two of the best solar companies in the business, First Solar and SunPower, created 8point3 Energy in early 2015 for just this purpose.
Despite solar's difficulties in 2016 (cheap Chinese solar panels continued to weigh on the sector), 8point3 achieved significant growth and strong operating results in fiscal 2016. Total revenue increased from $23 million in fiscal 2013 to $61.42 million in fiscal 2016, and net income registered at $27 million.
Again, profit figures rarely tell the whole story for partnerships whose sole purpose is to own cash-generating assets and pay out the profits to shareholders. More tellingly, 8point3 owns 10 industrial-scale solar projects whose electricity production is contracted out to various utilities (including Warren Buffett's MidAmerican Energy) in deals with an average span of 21 years. Those long periods of guaranteed cash flow ensure that 8point3 will be generating distributions for years to come, which is great because current investors already enjoy a 7.6% dividend yield.
Investors should note that one of the company's two sponsors, SunPower, has begun voicing concerns over its involvement in 8Point3. Investors reacted to this news with ambivalence, as it simply means that SunPower does not believe 8point3 Energy Partners is garnering a proper valuation from Wall Street (which makes it harder to raise capital to buy additional solar assets). 8point3's business is sound, so there are only a few ways this tale can end -- a sale, a continuation of business as usual, or some other corporate action that will more than likely leave investors smiling.
All in all, with a sky-high dividend yield, over two decades worth of solar electricity sales guaranteed, and a clear path for growth, this is a renewable energy stock investors would be well advised to consider.
Foolish final thoughts
It's not easy investing in young industries -- just ask early shareholders in the railroads of the late 1800s, or in any one of the thousands of 1990s internet start-ups that wound up in bankruptcy. While renewable energy is relatively new to the global economy and financial markets, the three companies described above offer an attractive mix of sound profitability and green operations, making them fantastic picks for anyone looking for exposure to this sector.
