Want stability? These 3 Energy Stores Are As Safe As They Come
The energy industry is notoriously volatile. Energy prices can rise or fall significantly if there are supply or demand issues. For this reason, the sector is not known for its ability to generate stable growth.
However, some energy companies have learned to adapt their business models to thrive in this environment. Three energy stocks which stand out for their safety in the sector are Brookfield Power (NYSE: BEPC)(NYSE:BEP), Enterprise Product Partners (NYSE:EPD)and NextEra Energy (NYSE:NEE).
The leader in very low-risk renewable energies
World leader renewable energy Producer Brookfield Renewable has built his business around stability. The company has a low-risk business model. It operates a globally diversified portfolio of renewable energy facilities.
Brookfield sells the electricity it generates to end users such as electric utilities and large enterprises under long-term, fixed-rate power purchase agreements (PPAs). This allows the company to generate stable cash flow.
The company complements this conservative business model with a leading financial profile. He has a reasonable dividend payout ratio and one of the highest credit ratings in the renewable energy industry. This gives it the financial flexibility to pay out an attractive dividend while growing its operations.
Brookfield’s low-risk business model and strong financial profile give it plenty of visibility into its future growth. A combination of higher electricity prices, cost reduction initiatives and its development program is expected to generate 6% to 11% growth in cash flow per share through 2026. Acquisitions could add 9 additional % to its net income each year.
This forecast easily supports its plan to grow its dividend by 5% to 9% per year. This would continue its steady growth, as it recorded its 11th consecutive annual dividend increase earlier this year.
A consistency model
Enterprise Products Partners has proven its durability over the years. The Master Limited Partnership (MLP) has increased cash distributions to its investors for 23 consecutive years.
An important factor behind this stability is its business model. MLP operates a diverse portfolio of midstream energy assets such as oil and gas pipelines, processing plants, storage terminals and export facilities. These assets primarily generate regular fee-based revenue for Enterprise.
While Enterprise pays out a good chunk of that money to support its dividend, it covered its 1.7x payout last year. This gave him some of the money to fund his expansion program. At the same time, it has one of the best balance sheets in the MLP industry, providing additional financial flexibility to fund growth.
Enterprise’s strong balance sheet also gives it the flexibility to make acquisitions. It unveiled its latest deal earlier this year, acquiring Navitas Midstream for $3.25 billion. Along with Enterprise’s expansion plans, this acquisition should give it the fuel it needs to continue its distribution growth in the years to come.
A powerful combination
NextEra Energy is one of the nation’s largest electric utilities. It also owns a major energy resources business, which operates renewable energy facilities, gas pipelines and power transmission lines. The utilities business generates stable earnings supported by government-regulated tariffs, while the energy resources segment generates stable fee-based cash flows.
The company also benefits from a leading financial profile. It has a lower dividend payout ratio than other utilities and one of the strongest balance sheets in the industry. This gives it the financial flexibility to invest billions of dollars in expanding its industry-leading clean energy infrastructure operations.
This should allow the company to continue to generate steady earnings and dividend growth. NextEra has grown its adjusted earnings per share at a compound annual growth rate of 8.4% since 2006, while increasing the dividend at a compound annual rate of 9.8% during this period.
Overall, it has recorded more than 25 consecutive years of dividend growth, qualifying it as Dividend Aristocrat. He currently plans to increase his payment by around 10% per year until at least 2024, thanks to his investments in clean energy and his rock-solid financial profile.
Security in a risky industry
Brookfield Renewable, Enterprise Products Partners and NextEra Energy stand out in the energy sector for their stable business models and conservative financial profiles. This has allowed them to generate consistent earnings and dividend growth over the years, despite the volatility of the industry. This trio should continue to produce stable results, making them less risky ways to invest in the energy sector.
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Matthew DiLallo owns Brookfield Renewable Corporation Inc., Brookfield Renewable Partners LP, Enterprise Products Partners and NextEra Energy. The Motley Fool owns and recommends Brookfield Renewable Corporation Inc. and NextEra Energy. The Motley Fool recommends Enterprise Products Partners. 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.