The energy sector is off to a solid start in 2024. The average energy stock (as measured by the Energy Select Sector SPDR ETF) is up more than 10% this year. Higher oil prices have helped fuel the rally in energy stocks.
However, not all energy stocks are in rally mode. Enbridge(NYSE: ENB) and Brookfield Renewable(NYSE: BEPC)(NYSE: BEP) are two notable laggards. That relative underperformance is one of the many reasons they look like screaming buys this May.
The fuel to continue producing above-average total returns
Enbridge's stock price is down slightly this year. That sluggish start comes even though the Canadian pipeline and utility company is having another solid year. The company reported record earnings for 2023 in February, delivering 6% earnings growth last year. That marked its 18th straight year of achieving its financial guidance. Meanwhile, it reaffirmed its 2024 financial guidance.
The energy infrastructure company has continued executing 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 Dominion it expects to close this year. It also entered into a joint venture connecting the Permian Basin to growing demand centers along the U.S. Gulf Coast. That deal will immediately boost its cash flow while enhancing its long-term growth outlook. Enbridge also completed the sale of some non-core assets. It plans to recycle that capital into its gas-utility acquisitions.
These moves further enhance Enbridge's long-term growth visibility. The pipeline company expects to deliver 7% to 9% annual-earnings growth through 2026, with distributable cash-flow per share rising by around 3% per year. It anticipates earnings and cash flow will grow by around 5% annually after 2026. The company expects to deliver that growth while maintaining a strong financial profile, including a low leverage level and a reasonable dividend-payout ratio.
That should support continued dividend growth for Enbridge. The company has raised its payout for 29 straight years. With shares down and the dividend payment continuing to rise (Enbridge increased it by 3.1% this year), the yield is up to 7.6%. That provides investors with a strong base return. Add to that its 3% cash-flow per-share growth in the near term and 5% over the medium term, and Enbridge should deliver 10% to 12% annualized total returns in the coming years. That aligns with the above-average annualized total-shareholder return the company has produced over the last 20 years.
Powerful growth ahead
Shares of Brookfield Renewable have slumped more than 15% this year. That's a real head scratcher because the leading global renewable-energy producer is having another strong year.
The company reported its fourth-quarter results in early February. "2023 was a record year for our business on almost all metrics," commented CEO Connor Teskey in the earnings press release. The company delivered record funds from operations (FFO) of nearly $1.1 billion, up 7% on a per-share basis. It also committed to deploying a record $9 billion into new transactions ($2 billion it will fund on its balance sheet). That gave the company the confidence to increase its dividend by another 5%, its 13th straight year of delivering at least 5% annual dividend growth.
While the company's 7% FFO per-share growth rate was below its 10%+ annual target, that was largely due to later-than-expected transaction closings in Q4. That headwind will become a tailwind in 2024 and beyond. Brookfield believes it can deliver 10%+ FFO per-share growth through at least 2028, powered by inflation-linked electricity prices, margin-enhancement activities, its massive development pipeline, 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 deal with Microsoft to power growth in the 2026 to 2030 time frame. That was by far the largest-ever corporate power-purchase agreement.
Brookfield Renewable's strong growth profile should easily support its target of increasing its dividend by 5% to 9% annually. With its dividend yield around 5.8% and earnings growing by more than 10% annually, Brookfield could have the power to produce total annualized returns in the mid-teens.
Strong return potential
Enbridge and Brookfield Renewable haven't kept pace with other energy stocks this year. Because of that, they look like screaming buys, given their long-term growth prospects. Add in their high-yielding and steadily rising dividends, and they could produce market-beating total returns in the coming years.
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Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and Enbridge. The Motley Fool has 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 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
