There’s no questioning the fact that as a population, we’re moving towards cleaner, greener forms of energy. Fossil fuels will be a thing of the past, and the world will benefit immensely from it.
How long will it take before Canadian renewable companies dominate the energy scene? It’s difficult to say.
The effects of fossil fuels on the climate and climate change in general is an extremely touchy subject, and arguments from both sides tend to pack a sizable punch in terms of support. But all while this is happening, green energy companies here in Canada are quietly amassing large asset bases and production capacities. It’s an investment gold mine.
Your best bet as an investor is to take advantage of an inevitable transition early enough to reap large rewards.
Because whether it’s 5, 20 or 40 years down the line, you stand to benefit by owning clean energy stocks in Canada.
Sure, this sector doesn’t have the allure of other high growth markets like Canadian weed stocks, but there is still a ton of potential here.
What exactly do renewable energy companies do?
Renewable energy is defined as such:
“energy from natural resources that can be naturally replenished within a human lifespan.” – Natural Resources Canada
Renewable energy companies provide sources of power that are often considered cleaner and more sustainable. How about some examples of renewable power?
Renewable energy provides nearly 20% of Canada’s energy supply, with hydroelectricity accounting for over half of that.
A common misconception, renewble companies aren’t the new kids on the block. They have been around for quite some time now, and as a result renewable energy stocks provide stable and reliable cash flows, much like regulated utility giants Fortis, Canadian Utilities and Emera.
The end result? Renewable energy stocks are able to provide strong dividends to go along with upside potential in an ever growing industry.
Lets take a closer look at four renewable energy companies we think are the cream of the crop here in Canada for 2020.
**P.S – If you’re looking for a little extra info on Brookfield and Algonquin, I go over 3 of the best utility stocks in Canada in the video below. BEP and AQN are 2 of the 3**
Four Canadian renewable energy companies you need to be looking at in 2020
4. Brookfield Renewable Energy Partners (TSX:BEP.UN)
Brookfield Renewable Energy Partners (TSX:BEP.UN) is another pure-play renewable company and is one of the fastest growing by a landslide. The company is expected to grow earnings at a rate of nearly 40% over the next 5 years.
To add to this, the company is already the fastest growing pure-play renewable energy company in the country with a compound annual growth rate of 10.71%.
The company has over 18,000 MW of capacity and over 5,250 facilities in North America, Europe, Asia and South America. The company’s goal is to deliver shareholders annual returns in the 12-15% range. Thus far, its more than accomplished its objective.
The company’s portfolio consists of wind, solar, storage facilities and distributed generation and most importantly, hydroelectric, which makes up over 74% of its portfolio.
Recently, the company entered an agreement to buy Terraform Energy in an all stock deal. This purchase will make Brookfield Renewable Partners the biggest pure-play renewable energy company in the world. The purchase does present high potential, but also high risk. Brookfield would assume over $5.5 billion in debt. Terraform had a debt to capital ratio of nearly 75%. Compared to Brookfields 33%, this is a significant rise.
With that being said, the company pays a very generious dividend of 4.36% and the dividend accounts for only 87% of funds from operations. Management has stated they want its dividend to grow by 5-9% annually over the next 5 years. This would be an increase to its past results, as it currently sits with a 5 year dividend growth rate of around 7%.
Brookfield Renewables has ran up a bit recently, and it may be wise for investors looking to grab this renewable energy giant to wait for a dip. Analysts are signalling sharp downside for the company at these price levels. It is trading at over 200 times forward earnings and is probably the most expensive renewable company in Canada right now.
That is primarily the reason why the stock is number 4 on this list. With a dip in price, it could easily launch to the first position. So with that being said, keep Brookfield Renewables on your watchlist for now.
Mkt Cap: $10.948 Billion
YTD Gains: 1.2%
Fwd P/E: 203.90
1Yr Price Target: $44.50
3. Pinnacle Renewable Energy (TSX:PL)
Pinnacle Renewables (TSX:PL) may not exactly be the type of company you’re expecting on this list, but it’s a company that is in a prime position to take advantage of an emerging renewable market.
Pinnacle operates in an industry that is very young. The company provides the pellets used in thermal power generators to produce renewable power. With facilities spanning across Western Canada and one down south in Alabama, the company’s pellets are becoming extremely popular. In fact, consumption is expected to more than double by 2026.
The company has long term take-or-pay contracts with power generators in the U.K., Europe and Asia than represent nearly 110% of its production capacity. These contracts are expected to continue until 2026, and the company currently has a backlog that exceeds $7 billion.
There is a lot of promise with Pinnacle, however there is heightened risk. Its product is very much in the infancy stages, and as such can be made obsolete by technological advancements. For Pinnacle to really thrive, there needs to be more aggressive of a transition towards greener energy.
Pinnacle provides a fair share of volatility, and that is mainly due to the fact it is very sporadic when it comes to earnings. The company seems to exceed, or miss estimates by a wide margin.
The company is currently trading at 69 times forward earnings and pays a very lucrative dividend of 5.7%. And although the payout ratio may seem high, the company’s dividend is well covered by underlying cash flows, a more reliable metric.
Pinnacle is the biggest risk/reward pick on this list of renewable energy stocks, and as such should be looked at by investors with a larger appetite for risk. With a price target of nearly $13, there is significant upside from today’s price levels. This is exactly why the stock is also featured on our list of the best Canadian stocks to buy for 2020.
Mkt Cap: $343 Million
YTD Gains: 3.9%
Fwd P/E: 32.22
1Yr Price Target: $12.65
2. Northland Power (TSX:NPI)
Northland Power (TSX:NPI) is a pure play renewable energy company, and one that has been in business for a long period of time. The company was established in 1987, and operates nearly 2500 MW of electricity.
The company also has an additional 400 MW of capacity under construction, which would increase its gross production by 16.5%.
Northland has witnessed some incredible growth in terms of earnings over the last 3 years with a compound annual growth rate (CAGR) of 31%. The company has also managed to more than double revenue since 2015.
The bulk of the company’s renewable operations are located in Eastern Canada. In fact, the farthest the company reaches out west are two facilities in Saskatchewan. It’s Spy Hill facility with 86 MW worth of production and its North Battleford facility, with 260 MW of production. Both of these facilities generate power by burning natural gas and full contracts are established until 2036 and 2033 respectively.
The company has a total of 25 assets, 2 of those we’ve already spoke about. With 19 facilities, the province of Ontario is the most popular. Quebec has 2 wind farms, while the Netherlands and Germany have one wind farm each, Netherlands being offshore.
The renewable company recently closed on its acquisition of EBSA, a Colombian regulated utility company for around $1.05 billion. EBSA serves nearly half a million customers, and its revenue is highly regulated, thus highly reliable.
The company is trading at fairly respectable levels right now with a forward price to earnings of 15.6. This is one of the lowest ratios out of all renewable companies. 1 year price targets don’t signal much upside with this stock right now, as it has surged to start 2020. But keep in mind, the stock does pay a healthy yield of 4.17% with a payout ratio of 77%.
Mkt Cap: $5.74 Billion
YTD Gains: 8.4%
Fwd P/E: 14.67
1Yr Price Target: $29.22
1. Algonquin Power (TSX:AQN)
Unlike Northland, Algonquin Power (TSX:AQN) is not a pure-play renewable company. The company provides both renewable and regulated utilities primarily in the United States. The company operates in 12 states, including Arizona, California and Texas.
The company has grown exponentially over the years, and with a market cap of $10.5 billion, Algonquin isn’t considered a “small” utility player anymore.
Algonquin is a top 5 holding in one of Canada’s biggest utility ETFs (XUT). The stock makes up over 8% of the ETFs assets, which is a huge positive.
Algonquin is one of the best performing utility companies in the country over the last 5 years, and it shows with its compound annual growth rate of nearly 14%. The company has a long term expected growth rate of 6.3%, which is well above the 4.6% industry average.
It’s capacity is 35% renewables (and growing) and 53 facilities are underpinned by long-term PPA contracts of over 15 years. It is one of only two utility companies, and the only renewable energy stock to maintain double digit dividend growth over the last half decade.
The company currently yields around 4%, and there is another interesting dynamic to Algonquin, and that is the fact its dividend is paid in US Dollars. The company is a Canadian Dividend Aristocrat, and I would expect dividend increases to continue well into the future.
With its strong stock appreciation over the last five years, investors seeking renewable energy stocks may look elsewhere, thinking the company is overvalued. However, with a forward price to earnings of 20, it is trading right in line with major peers such as Fortis (20.5) Emera (21.3) and Canadian Utilities (19.5).
Considering the growth prospects of the company, along with the fact it pays a higher yield than some major utility players, we believe Algonquin is not only one of the best Canadian renewable energy stocks to buy today, but one of the best utility companies period. The stock is currently one of the top companies on our list of Canadian dividend stocks to be looking at in 2020.
Mkt Cap: $10.434 Billion
YTD Gains: 8.2%
Fwd P/E: 29.18
1Yr Price Target: $16.37