The energy sector is off to a good start in 2024. The average energy stock (as measured by the Select Energy Sector SPDR ETF) is up more than 10% this year. Rising oil prices helped fuel the recovery in energy stocks.
However, not all energy values are in rally mode. Enbridge (NYSE:ENB) And Brookfield Renewable Energy (NYSE:BEPC)(NYSE:BEP) are two notable latecomers. This relative underperformance is one of many reasons they appear to be going for screaming buys in May.
The fuel to continue producing above-average overall yields
Enbridge’s stock price is down slightly this year. This slow start is coming even if the Canadian pipeline and utility the company is having another strong year. The company reported record 2023 profits in February, with profit growth of 6% last year. This marked the 18th consecutive year it achieved its financial goals. At the same time, it reaffirmed its financial forecasts for 2024.
The energy infrastructure company continued to execute on 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 from Domination it is expected to close this year. He also entered In a joint venture connecting the Permian Basin to centers of growing demand along the U.S. Gulf Coast. This deal will immediately increase its cash flow while improving its long-term growth prospects. Enbridge also completed the sale of certain non-core assets. It plans to recycle this capital into its gas utility acquisitions.
These measures further enhance the visibility of Enbridge’s long-term growth. The pipeline company projects annual profit growth of 7% to 9% through 2026, with distributable cash flow per share up about 3%. per year. It expects earnings and cash flow to grow approximately 5% annually after 2026. The company plans to achieve this growth while maintaining a strong financial profile, including a low debt level and dividend payout ratio. reasonable.
This should support Enbridge’s continued dividend growth. The company has increased its payouts for 29 consecutive years. With the stock falling and the dividend continuing to rise (Enbridge raised it by 3.1% this year), the yield is up to 7.6%. This provides investors with a solid base return. Add in 3% growth in cash flow per share in the near term and 5% in the medium term, and Enbridge is expected to generate annualized total returns of 10% to 12% in the coming years. This corresponds to the above-average annualized total shareholder return that the company has produced over the past 20 years.
Strong growth ahead
Shares of Brookfield Renewable have fallen more than 15% this year. This is a real headache, as the world’s leading producer of renewable energy is having another good year.
The company released its fourth-quarter results in early February. “2023 was a banner year for our company on almost every metric,” commented CEO Connor Teskey in the earnings press release. The company generated record operating funds (FFO) of nearly $1.1 billion, up 7% on a per share basis. It also pledged to deploy a record $9 billion in new deals ($2 billion it will fund on its balance sheet). This gave the company the confidence to increase its dividend by another 5%, its 13th consecutive year of annual dividend growth of at least 5%.
While the company’s FFO per share growth rate of 7% was below its annual target of more than 10%, it was largely due to later-than-expected deal closings in the fourth quarter. This headwind will become a favorable wind in 2024 and beyond. Brookfield estimates it can deliver FFO per share growth of more than 10% through at least 2028, thanks to inflation-linked power prices, margin-enhancing activities, its massive pipeline development and merger and acquisition (M&A) activities. The company recently enhanced its ability to execute its long-term growth plan by signing a five-year, 10.5 gigawatt renewable energy development agreement with Microsoft to fuel growth from 2026 to 2030 time lapse. This is by far the largest power purchase agreement ever made by a company.
Brookfield Renewable’s strong growth profile should easily support its goal of increasing its dividend by 5% to 9% per year. With a dividend yield of around 5.8% and earnings growing at over 10% per year, Brookfield could have the power to produce total annualized returns in the mid-teens.
High return potential
Enbridge and Brookfield Renewable haven’t kept pace with other energy stocks this year. For this reason, they look like screaming buys, given their long-term growth prospects. Add In their high-yielding and ever-increasing dividends, and they could produce market-beating total returns in the years to come.
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Matt DiLallo holds positions at Brookfield Renewable, Brookfield Renewable Partners and Enbridge. The Motley Fool holds positions 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 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 Energy Stocks That Scream Buy in May was originally published by The Motley Fool
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