The energy sector has been one of the few bright spots in the market this year. Stocks in that sector are up by more than 30% on average compared to a double-digit percentage decline for the S&P 500.
Even with those big gains in the rear-view mirror, however, several energy stocks still look like compelling investment opportunities this August. In particular, three of our contributors see Enbridge (ENB -1.11%), Brookfield Renewable (BEPC 0.27%) (BEP 1.11%), and Kinder Morgan (KMI 0.98%) as no-brainer buys.
High yield and aligned with the world
Reuben Gregg Brewer (Enbridge): I probably sound like a broken record when it comes to Canadian midstream giant Enbridge — I recommend it often, but with good reason. The stock offers a generous 6% dividend yield, and management has boosted the payout for 27 straight years. Its cash flows are supported by diversified, fee-based businesses, so commodity prices aren’t the primary driving forces behind its results — energy demand is. It has an investment-grade rated balance sheet and currently generates around $2 billion more in cash flow annually than it needs to fund its business, capital investment plans, and dividend. The company appears to be in a great position right now and its growth options are wide open.
Normally, I highlight the fact that the company is also spending heavily on its renewable power business. Today, this division produces just 4% of Enbridge’s earnings before interest, taxes, depreciation, and amortization (EBITDA), but it’s earmarked to get roughly 30% of the company’s capital investment budget. That will be a long-term positive, but the renewable energy transition is likely to be decades in the making. That’s why it is important to highlight that Enbridge is also planning to grow its natural gas midstream operations. Natural gas is expected to be favored as a transition fuel as the world moves away from dirtier coal and oil. On this front, Enbridge recently entered into a partnership to build a new liquified natural gas export terminal in Canada.
What’s notable is that Enbridge is looking for both its clean energy and natural gas operations to grow at the expense of its oil business. That’s basically the same shift the world is making right now. If you want to own shares of a high-yield energy company that’s perfectly aligned with industry trends, Enbridge should be on your short list.
Powerful growth ahead
Matt DiLallo (Brookfield Renewable): Brookfield Renewable has a long history of producing for investors. The renewable energy company has delivered 18% annualized total returns since its inception, and those annualized returns accelerated to 26% over the last five years — significantly outpacing the market.
Brookfield should be able to continue producing market-beating total returns in the future. Management sees a quartet of drivers — higher power prices, development projects, inflation, and acquisitions — producing up to 20% annualized growth in its funds from operations per share through 2026. That’s a potential acceleration from what it has delivered over the past decade, driven by the world’s accelerating pivot toward renewable energy.
The company already has a lot of growth lined up. Brookfield has 69 gigawatts of development projects in the pipeline, more than triple the output of its current operating portfolio. Meanwhile, it continues to find compelling acquisition opportunities. It has broadened its focus in recent years from purchasing operating renewable energy assets to acquiring development pipelines and companies in the early stages of their clean energy transitions. Management sees a more than $200 billion opportunity in energy transition alone in the coming years.
These catalysts should give Brookfield Renewable plenty of power to continue growing its dividend, which at current share prices yields 3%. Management aims to boost its payouts by 5% to 9% per year. Add that dividend to its big-time growth prospects, and Brookfield should be able to continue producing strong total returns. With the stock down about 10% from its recent peak, it looks like a no-brainer buy this month.
Pay attention where the market doesn’t
Neha Chamaria (Kinder Morgan): With crude oil prices heading back down from their recent exorbitant levels, stocks like Kinder Morgan are ripe for the picking.
As one of North America’s biggest midstream companies, Kinder Morgan will keep making money and paying reliable dividends regardless of what oil prices do. That explains why just a couple of weeks ago, management bumped up its full-year guidance for net income and distributable cash flow by 5% from its initial forecasts of $2.5 billion and $4.7 billion, respectively.
At its current pace, Kinder Morgan is on its way to posting record profits in 2022. Its distributable cash flow could be lower than it was in 2021, but only because that year was exceptional due to windfall gains resulting from the historic winter storm that battered Texas and impacted a large swath of North America in February. Absent those non-recurring gains, Kinder Morgan could have easily delivered a record level of distributable cash flow this year.
Given its pace of growth, it makes little sense that Kinder Morgan’s stock dropped by a double-digit percentage over the past couple of months. Though oil prices are falling, that won’t hurt Kinder Morgan’s prospects. It leases its capacity under long-term, fee-based contracts that offer excellent visibility into its future income and cash flow. And the company increased its dividend by 3% last month. At the current share price, it now yields an impressive 6.2%.
During these uncertain times in the market, it’s good to have stocks in your portfolio that you can feel safe about owning. Thanks to its dividend growth and high yield, as well as its stable business model, strong financials, and robust growth pipeline, Kinder Morgan is just that kind of stock.
Matthew DiLallo has positions in Brookfield Renewable Corporation Inc., Brookfield Renewable Partners L.P., Enbridge, and Kinder Morgan. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Brookfield Renewable Corporation Inc., Enbridge, and Kinder Morgan. The Motley Fool has a disclosure policy.
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