The world needs to invest a staggering $10 trillion to replace our existing fossil-fuel energy systems with renewables. This multidecade transition represents a tremendous growth opportunity for investors. That's why they should consider adding a renewable energy stock to their portfolio.
We asked three Motley Fool contributors for their top stock in the sector. They selected TerraForm Power (NASDAQ: TERP), Brookfield Renewable Partners (NYSE: BEP), and SunPower (NASDAQ: SPWR). Here's why they think these renewable energy stocks have the brightest futures.
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The turnaround plan is paying dividends
Matt DiLallo (TerraForm Power): TerraForm Power spent the past year implementing a multipronged strategy to improve its operations, financial profile, and growth prospects. Not only has it worked on several initiatives to enhance the profitability of its legacy assets, but it also used its improving financial picture to make a needle-moving acquisition. Because of that, the renewable energy company's plan is starting to deliver results. That was evident during the first quarter, when cash flow per share zoomed more than 30%.
TerraForm currently has enough embedded growth potential within its existing portfolio to increase cash flow from the current run-rate of $1.07 per share up to as much as $1.22 by 2022. That supports the company's plan to increase its 6%-yielding dividend at a 5% to 8% annual rate over that time frame while maintaining its targeted payout ratio of 80% to 85% of cash flow.
In addition to the growth TerraForm already has lined up, it could make additional acquisitions. The company currently has $1 billion of available liquidity as well as a very supportive parent company, which helped fund its last deal. TerraForm's ability to continue making value-creating acquisitions could enable it to grow cash flow and its dividend at an even faster rate over the next few years.
TerraForm Power's combination of yield and growth has the potential to power market-beating total returns. That upside makes it one of the top renewable energy stocks to buy these days.
The best moneymaker in renewables
Jason Hall (Brookfield Renewable Partners): When it comes to renewable energy investing, many people automatically think about high-risk companies trying to develop world-changing technologies.
But one only has to look at the struggles many solar panel makers have faced in recent years due to swings in demand to learn the painful truth about investing in renewables: Those high-growth, high-tech companies can lose a lot of money in a short period, sending their stock prices down along the way.
On the other hand, Brookfield Renewable Partners is closer to a utility than a tech company, and knows how to make money across any economic or demand environment. Since early 2012, funds from operations per share have increased 524%; that's allowed the partnership to raise its quarterly payout every year, pushing it almost 50% higher.
I expect investors can count on its cash flows continuing their upward trajectory for years to come. Brookfield Renewable's business is built on identifying high-quality, high-return assets in renewable energy production that it can acquire at a reasonable price, and then improving them to drive cash flows even higher. It then sells the power those assets generate on long-term contracts, delivering predictable cash flows, which it uses to reward investors and repeat the "identify, buy, improve" process.
Case in point: Brookfield Renewable directly owns 30% of TerraForm Power, my colleague Matt's pick this month. Under Brookfield's stewardship, TerraForm has vastly improved its cash flows and returns, and Brookfield now earns a double-digit yield on its original investment dollars.
Moreover, management's long-term view also includes a willingness to sell mature, low-return/low-growth assets, delivering even more capital to recycle into higher-return assets. In the short term, this can cause periods of weak or even stagnant cash flows, but the long-term results speak for themselves.
With a dividend yield above 6% at recent prices, it's absolutely worth buying now; with top management and an incredible path to long-term growth, it's one you'll want to hold for years to come.
The premier solar play
Travis Hoium (SunPower): Matt and Jason have covered the yieldco market that's the lowest-risk way to invest in renewable energy today. On the supplier side, SunPower is an industry leader that makes the world's most efficient solar panels. It supplies everything from small residential installations to large solar farms, so it has a unique place in the industry.
I don't think SunPower is a great buy today because it's had great financial performance -- it hasn't, as you can see below. Instead, I like where the company is going.
SunPower's A-Series solar panels are up to 22.8% efficient at converting the sun's energy into electricity, which far surpasses commodity products that are 16% to 18% efficient. That hasn't made the company money in the past, but what's changed in the last year is a new manufacturing process that's created larger, lower-cost solar cells that should improve SunPower's gross margins from the high single digits or low double digits to 20% or more. If it can do that in the residential and commercial segments, it would be a huge turnaround and create a ton of upside for investors.
On the utility solar side, SunPower has moved to a product called P-Series that assembles commodity solar cells into a solar panel that's slightly more efficient than those of competitors. It acquired a new plant in Oregon that's tariff-free, which could be a big advantage in the U.S. As the tariff war rages, SunPower may be able to generate a windfall in U.S. solar.
This is really a turnaround story, but given the company's $1.1 billion market cap and less than $1 billion in debt (and falling), I think it's a risk worth taking with the solar industry's long-term potential.
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Jason Hall owns shares of Brookfield Renewable Partners L.P., SunPower, and TerraForm Power. Matthew DiLallo owns shares of Brookfield Renewable Partners L.P. and TerraForm Power. Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.