With an $11 billion market cap, AES (AES -0.70%) isn't the largest utility around. But it does have a unique feature that most of its peers lack: global geographic diversification. That puts the company in a good position to benefit as the world embarks on a multidecade transition to cleaner energy sources. And AES is already starting to take advantage of the trends.
AES' No. 1 focus
When AES held its investor day in May 2023, it listed four strategic actions that it would be taking. The list included things you might expect, like "invest in our U.S. utilities" and "exit coal" while maximizing gas and liquified natural gas. Those are common themes in the utility sector. But the other two items on the list were a bit more interesting, including "develop a leading green hydrogen platform," and, the No. 1 item on the list, "grow in carbon-free energy in select markets."
Image source: Getty Images.
With clean energy basically taking two of the top four slots, you know that riding the clean energy transition is a big deal. In fact, the "investing in U.S. utilities" goal doesn't exclude clean energy, and the final goal is basically about reducing the utility's dependence on carbon fuels. It appears that clean energy is almost the entire game at AES right now.
You can see that in other ways as well. For example, the company put 1.4 gigawatts of renewable power into service in 2022. It is on track to more than double that figure to 3.5 gigawatts in 2023. AES is clearly pushing the accelerator here.
AES has plenty of room to run
This is where AES' business mix comes into play, in more ways than one. In 2022, renewables made up around 46% of the company's production mix. The rest of its 32 gigawatts of generating capacity was split between coal (21%) and natural gas (33%). By 2027 the plan is to eliminate coal and increase clean energy to 79%. Natural gas will drop to around 21% of the pie, but the pie is expected to have grown to at least 57 gigawatts. Obviously the biggest changes are going to be the shut down or sale of coal assets and increasing investment in clean energy.
Even more interesting, AES doesn't operate exclusively in the United States like many of its utility peers. In fact, U.S. renewable power accounts for around 44% of the company's total renewable capacity, including backlog assets with signed contracts. The rest comes from Brazil (20%), Chile (16%), and "other" (the remainder). That's notable because it means that AES isn't reliant on just one country to support its long-term clean energy ambitions.
The company highlighted its backlog of 11.3 gigawatts in May. It updated that figure to 13.1 gigawatts when it reported third-quarter 2023 earnings in November. So in roughly six months, the company's clean energy backlog grew by roughly 16%. Around 75% of that backlog is expected to be completed between now and the end of 2025, with 44% of the total backlog currently under construction. The rest of the backlog will be completed after 2025, offering a longer runway for the company's capital investment plans.
If you are looking for a way to play the global clean energy transition, this utility should probably be on your watch list.
AES is not going to be an overnight clean energy success story
Getting more and more clean is clearly the goal at AES, but don't forget that coal still makes up a sizable portion of its generating capacity. And then there's natural gas, which is set to shrink, but not go away. So this isn't a pure-play clean energy stock. But it is a utility that's trying to take aggressive advantage of the world's shift toward cleaner alternatives. With a reasonably attractive 3.8% dividend yield and a stock that's lost over a third of its value over the past year, it might be time for more aggressive investors to consider buying here.
