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Martin Tillier

Martin Tillier

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A Relatively Safe Bet On Renewable Energy

Energy

In some ways, this may seem like a strange time to be talking about renewable energy. The Trump administration is extremely pro-fossil fuel and have rolled back environmental regulations and rubber-stamped pipeline and other infrastructure programs at a record rate. The fact is though, politics aside, the inexorable march towards replacing oil and coal for power generation continues, and that is not just the view of environmentalists and activists.

 BP’s Energy Outlook Report for 2019 was released last week, and the oil giant predicts that global energy demand will continue to increase, but that 85% of that increase will be met by renewables and natural gas. That is a long-term trend, but the problem for investors has been how to play it.

NextEra is a power generation company, but one that generates most of its electricity from renewable sources and has done so for a long time, since before that was trendy. Over tine they have become experts at not just generating power from wind and solar but also, and more importantly, storing that energy. Storage is a huge issue for renewables, and NextEra’s proven success there is a big asset.

(Click to enlarge)

The renewable energy market has been so heavily subsidized that assessing specialist businesses in the field has been difficult, if not impossible. The big, integrated firms have embraced alternatives, but they still make up such a small part of their revenue that their stock is not really a play on that field.

Given the many failures and disappointments in alternative energy investments as subsidies are reduced and removed, the best way for investors to play the shift is to look for proven success, and on that basis, NextEra Energy (NEE) is a smart holding in long-term portfolios.

NextEra is a power generation company, but one that generates most of its electricity from renewable sources and has done so for a long time, since before that was trendy. Over tine they have become experts at not just generating power from wind and solar but also, and more importantly, storing that energy. Storage is a huge issue for renewables, and NextEra’s proven success there is a big asset.

(Click to enlarge)

Regular readers of my musings will look at the chart above and instantly realize that NEE is not a typical pick for me. My dealing room background makes me partial to value opportunities in depressed stock as a rule, rather than a big player of existing momentum, and NEE is up around twenty-four percent over the last year. Still, when assessing a stock as a long-term investment, past performance is not the most important metric.

Future growth is far more important in that regard, and NEE scores well there. The average of Wall Street analysts’ prediction of growth at NEE for the next five years is around 7.5%. That may not sound spectacular, but it is good for the industry and they have a history of beating expectations. Helped by a push towards renewable energy generally, further beats would come as no surprise.

Of course, if the last couple of years of significant gains in the stock had got us to the point where any expected gains were fully priced in, or even overdone, that wouldn’t matter but that isn’t the case. NEE currently trades at around thirteen and a half times trailing earnings, which represents a discount to the broader market. The S&P 500 currently has a trailing P/E of over twenty.

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Given where the stock is, NEE can hardly be described as screaming value, but with an expected forward dividend yield of 2.7% and as a company at the forefront of a major shift in energy consumption globally it is a solid stock that can provide a buffer against future volatility and can be expected to offer decent overall returns for a long time to come.

By Martin Tillier






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  • Don on February 24 2019 said:
    Perhaps you would be more correct in saying natural gas and renewables. As opposed to reversing the order. What percentage of increased demand do you (or did BP) project to covered by each source?

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