Elections shouldn't drive our investing decisions overall, but elections do have consequences for some industries. In the case of renewable energy stocks, the election of Donald Trump four years ago brought with it higher costs through tariffs, less favorable policies by electricity regulators, and help for competing energy sources like coal. That didn't stop renewable energy from growing over the last four years, but it certainly didn't help.
As we look ahead to the upcoming election, there could be some big changes in store for renewable energy no matter who wins. Our picks to get investors ready for the election and potential upside from changes in renewable energy policy are Hannon Armstrong (NYSE: HASI), NextEra Energy (NYSE: NEE), and Atlantica Sustainable Infrastructure (NASDAQ: AY).
Image source: Getty Images.
Flexibility in renewable energy
Travis Hoium (Hannon Armstrong Sustainable Infrastructure Capital): Like any company that invests in renewable energy projects, Hannon Armstrong is in the business of generating a yield from its investments. They just happen to be renewable energy investments rather than owning real estate or pipelines or corporate bonds.
What makes Hannon Armstrong different is the flexibility with which it can invest funds. The company can take equity or debt positions in projects, finance efficiency improvements, or even pay for ecological restoration. This means management can shift dollars to where it can get the best return for the risk, rather than being locked into one type of asset class in renewable energy. The result for investors has been impressive since the company went public.
No matter what happens with this election, flexibility will be key for renewable energy companies. If Trump wins, they will need to find the opportunities to grow where available, which Hannon Armstrong has shown it can do. If Joe Biden wins, they will need to navigate a new policy and incentive landscape that could quickly add fuel to the industry. Few companies have the ability to adapt and succeed in the current environment like Hannon Armstrong, and investors will be rewarded with not only a great stock but a 3.1% dividend yield as well.
The right time
Howard Smith (NextEra Energy): The upcoming election isn't going to reverse a trend that has been ongoing in the energy sector, but it could accelerate it. The coronavirus pandemic caused a drop in overall global energy demand and investments, but a look at the details tells a story that investors should pay attention to.
The International Energy Agency expects total energy demand to drop by about 5% in 2020, and energy investments by 18%. But while coal, gas, nuclear, and oil are in decline, it estimates growing demand from renewable energy generation. Investors can benefit from that growing disparity by investing in utility and clean energy company NextEra Energy.
Image source: Getty Images.
NextEra announced its third-quarter earnings this week, and adjusted earnings per share (EPS) grew 11% compared to the previous-year period. The parent of electric utilities Florida Power & Light and Gulf Power continues to grow its renewable energy generation capacity for those businesses. But its NextEra Energy Resources business is experiencing the strongest growth, with EPS up 23%.
The Energy Resources business is the world's largest generator of solar and wind power, and has a growing battery storage segment. The business originated a record number of energy generation projects in the third quarter, and added to its renewables backlog. The approximately 15,000 megawatts of backlog is now larger than Energy Resources' existing renewables portfolio.
NextEra recently increased its earnings estimate for 2021, and extended its earnings growth expectations of 6% to 8% off that higher base through 2023. The company also said it continues to expect a 10% annual dividend per share increase through 2022.
This growth should come regardless of who wins in the election. NextEra said in its earnings results that it would, in fact, be "disappointed" if its financial results didn't come in at, or near, the top end of those expectation ranges through 2023. With those projections being made prior to the election, investors should find it a good time to invest now, when there could even be more focus on renewables after the election results.
The future of energy, no matter who wins in November
Jason Hall (Atlantica Sustainable Infrastructure): As much as Democrats are considered to be better for renewable energy investments, the future of the world's power supply is heavily tied to solar and wind, no matter who's sitting in the Oval Office or roaming the halls of Congress. And few companies are as well-positioned to profit from this reality as Atlantica. The company owns, develops, and operates utility-scale wind and solar energy power plants, selling the power on long-term contracts. The result is steady, utility-like cash flows that it can use to fund new projects, and return to shareholders in a steadily growing dividend.
Atlantica is an international business, meaning that no matter what legislative action is taken in the U.S., its prospects remain very good. Moreover, Atlantica benefits from the falling costs of renewable energy technology, so its competitive advantages over fossil fuels actually get stronger with each technological improvement, and the need for government subsidies or incentives is becoming less and less relevant. Pair that with the growth in demand and the steady cash flows its assets deliver, and this is a monster stock in the making.
At recent prices, Atlantica's dividend yield is over 5.4%, and the prospects for regular dividend growth from here are very strong. Couple that with a business model that's not reliant on who's in charge in the U.S., and a massive growth runway in the years ahead, and Atlantica is a stock worth buying right now, no matter the outcome of U.S. election.
The theme is growth
You'll notice that each of the stocks we picked is involved in financing and owning renewable energy assets long term. As the industry grows and needs to finance more assets, these companies all have an enormous opportunity to grow as well. That's the theme of our picks ahead of the election, and no matter who wins, these stocks should do well.
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Howard Smith owns shares of NextEra Energy. Jason Hall owns shares of Atlantica Sustainable Infrastructure plc. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.