The energy sector is off to a solid start in 2024. The average energy supply (measured by the Energy Select Sector SPDR ETF) is up more than 10% this year. Higher oil prices have fueled the rally in energy stocks.
However, not all energy shares are in rally mode. Enbridge (NYSE: ENB) And Brookfield Renewable (NYSE: BEPC)(NYSE:BEP) are two notable laggards. This relative underperformance is one of the many reasons why they look like screaming buys in May.
The fuel to continue generating above-average total returns
Enbridge’s stock price is down slightly this year. That slow start comes even though the Canadian pipeline is and utility company has another solid year. The company reported record profits for 2023 in February and achieved 6% profit growth last year. That was the 18th year in a row in which the financial guidelines were met. Meanwhile, it reaffirmed its financial outlook for 2024.
The energy infrastructure company continued its strategic plan this year. It completed the acquisition of The East Ohio Gas Company in March, the first of three natural gas utility acquisitions Dominion it expects to close this year. That came in too go inside a joint venture connecting the Permian Basin to growing demand centers along the U.S. Gulf Coast. This deal will immediately boost cash flow while improving long-term growth prospects. Enbridge also completed the sale of some non-core assets. It plans to reuse that capital in the acquisitions of gas companies.
These steps further increase Enbridge’s long-term visibility. The pipeline company expects annual earnings growth of 7% to 9% through 2026, with distributable cash flow per share increasing by approximately 3% per year. It expects earnings and cash flow to grow about 5% annually after 2026. The company expects to achieve that growth while maintaining a strong financial profile, including a low debt level and a reasonable dividend payout ratio.
That should support continued dividend growth for Enbridge. The company has increased its payouts for 29 years in a row. As the shares have fallen and the dividend payment continues to rise (Enbridge has increased 3.1% this year), the yield has risen to 7.6%. This provides investors with a strong basic return. Add to that cash flow per share growth of 3% in the near term and 5% in the medium term, and Enbridge should deliver total annualized returns of 10% to 12% in the coming years. That matches the above-average total annualized shareholder return that the company has achieved over the past twenty years.
Strong growth ahead
Shares of Brookfield Renewable are down more than 15% this year. That is a real headache, because the largest global producer of renewable energy is having another strong year.
The company announced its fourth-quarter results in early February. “2023 was a record year for our company by almost every measure,” CEO Connor Teskey said in the earnings press release. The company raised record funds from operations (FFO) of nearly $1.1 billion, up 7% per share. It also pledged to spend a record $9 billion on new transactions ($2 billion that it will fund on its balance sheet). That gave the company the confidence to increase its dividend by another 5%, the 13th year in a row in which it achieved annual dividend growth of at least 5%.
While the company’s 7% FFO per share growth rate was below its annual target of more than 10%, that was largely due to later than expected transaction closings in the fourth quarter. That headwind will become a tailwind in 2024 and beyond. Brookfield believes it can deliver growth of more than 10% FFO per share through at least 2028, driven by inflation-linked electricity prices, margin-accelerating activities, its massive development pipeline and merger and acquisition (M&A) activity. The company recently increased its ability to execute its long-term growth plan by signing a five-year, 10.5 gigawatt renewable energy development agreement with Microsoft to stimulate growth in the period 2026-2030 time frame. That was by far the largest power purchase agreement ever made by companies.
Brookfield Renewable’s strong growth profile should easily support its target of increasing its dividend by 5% to 9% annually. With a dividend yield of around 5.8% and earnings growth of more than 10% per year, Brookfield could have the power to generate total annualized returns in the mid-teens.
Strong return potential
Enbridge and Brookfield Renewable have not kept pace with other energy stocks this year. That’s why they look like screaming buys given their long-term growth prospects. Add in their high-yielding and steadily rising dividends, and they could deliver total returns that beat the market for years to come.
Should you invest $1,000 in Enbridge now?
Consider the following before purchasing shares in Enbridge:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Enbridge wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $525,806!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns April 30, 2024
Matt DiLallo holds positions at Brookfield Renewable, Brookfield Renewable Partners and Enbridge. The Motley Fool holds positions in and recommends Brookfield Renewable, Enbridge, and Microsoft. The Motley Fool recommends Brookfield Renewable Partners and Dominion Energy and recommends the following options: long January 2026 calls $395 on Microsoft and short January 2026 calls $405 on Microsoft. The Motley Fool has a disclosure policy.
2 Energy Stocks That Are Screaming Buys in May was originally published by The Motley Fool
