While the White House may not have climate change at the top of its to-do list, the issue continues to resound in various corners of public discourse from Democratic presidential hopefuls on the campaign trail to individual business leaders like Jeff Bezos, founder and CEO of Amazon.com, who recently pledged $10 billion toward tackling the issue with the launch of the Bezos Earth Fund.
Astute investors who recognize this growing interest in climate change will surely be searching for related investment opportunities, such as those in renewable energy-oriented stocks. Fortunately, they need not look much further than Enphase Energy (ENPH -1.21%), iShares Global Clean Energy ETF (ICLN -0.60%), and Atlantica Yield (AY).
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Come for the microinverters, stay for the storage
Founded in 2006, Enphase Energy has grown considerably over the past 15 years in its plight to serve solar power customers. Celebrating the shipment of its 1 millionth microinverter and expansion into foreign markets in 2011, Enphase now has shipments of more than 23 million microinverters under its belt as well as a presence in 21 countries. But it's not only the company's leading position as a global supplier of solar microinverters that should appeal to renewable energy-minded investors, Enphase is in the midst of making its foray into the energy storage market. Currently, the company is taking pre-orders for its Encharge battery storage system, which it expects to begin shipping next month.
After reporting strong fourth-quarter 2019 earnings, Enphase has seen its stock soar, trading now near its all-time high. The company's impressive revenue growth in 2019 -- a 97% increase compared to 2018 -- wasn't the only metric that enthralled investors: Enphase reported diluted earnings per share (EPS) of $1.23 for 2019, representing a notable turnaround from the $0.12 loss per share it had in 2018; likewise, the company's increase in operational cash flow from $16 million in 2018 to $139 million in 2019 also shocked the market.
The all-in-one approach
For more conservative investors who are less willing to take on the risk associated with a single company, the iShares Global Clean Energy ETF represents an attractive option.
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While there are exchange-traded funds that focus more narrowly on only solar power or wind power, the iShares Global Clean Energy ETF's holdings provide investors with exposure to a wide variety of companies. Besides Enphase Energy and its peer, SolarEdge Technologies, for example, investors can find the wind turbine manufacturer, Vestas Wind Systems, as well as geothermal specialist, Ormat Technologies, among the top 10 holdings.
The stated objective of the iShares Global Clean Energy ETF is to "to track the investment results of an index composed of global equities in the clean energy sector." Since the ETF isn't actively managed, it offers investors a reasonable expense ratio of 0.46%. Distributions are made on a semi-annual basis, and as of Dec. 31, 2019, the ETF offered a trailing-12-month yield of 1.36%.
A clean energy powerhouse and dividend dynamo rolled into one
Offering investors the opportunity to invest in renewable energy while receiving an appealing dividend, Atlantica Yield is a yieldco which has steadily increased its distribution to shareholders over the past three years.
AY Dividend data by YCharts.
In the cases of some companies, raising the dividend -- though desirable -- doesn't necessarily translate to a high yield, but that's not the case with Atlantica Yield's dividend, which currently features a 5.05% forward yield. According to the company, there's plenty of growth on the horizon.
On its website, for example, Atlantica Yield states, "We target to distribute a very high percentage of our cash available for distribution and will seek to increase such cash dividends over time through the acquisition of additional contracted assets." Specifically, the dividend currently represents an annualized amount of $1.64, and the company aspires to grow this at a 5% to 6% compound annual growth rate through 2022.
Circumspect investors may be wary of a stock with a dividend yield north of 5%, but, in the case of Atlantica Yield, a look at the company's financials should help to allay their concerns. Management has identified a target of net corporate debt to cash available for distribution of three or lower, and as of the end of the company's third quarter for 2019, the ratio is 2.7. Moreover, the company has positive and stable outlooks on its corporate debt from Standard and Poor's and Fitch Ratings, respectively.
The renewable energy recap
For investors looking to warm up with a solar power-oriented stock, Enphase Energy is a viable option. Although shares may seem pricey now, the stock still has plenty of room to run thanks to the opportunities afforded by the energy storage market, which is expected to grow 13-fold from 2018 to 2024, according to Wood Mackenzie Power & Renewables, and investors with a longtime horizon (our favorite type of investors) may be rewarded for their patience.
While iShares Global Clean Energy ETF and Atlantica Yield both offer a more comprehensive approach to the renewable energy industry, risk-averse investors would be better served to opt for the ETF as the risk of a downturn in the performance of any one company is mitigated by the other holdings in the fund. Atlantica Yield, on the other hand, should draw the attention of those with a greater tolerance for risk, and for these investors the stock's current valuation of 8.4 times operating cash flow compared to its five-year average multiple of 9.74, according to Morningstar, seems rather compelling.
