The energy sector has had a down year in 2023. Rising interest rates and falling commodity prices weighed on the industry. While the S&P 500 has rallied more than 20% this year, energy stocks in that index are down by more than 3% on average.
However, while last year was a down year for the energy sector, 2024 could be a bounce-back year. Because of that, energy stocks could deliver strong total returns. NextEra Energy(NYSE: NEE), Brookfield Renewable (NYSE: BEP)(NYSE: BEPC), and Kinder Morgan(NYSE: KMI) stand out to a few Fool.com contributors as the best ones to buy heading into 2024. Here's why they think these energy stocks could put a charge in your portfolio next year.
NextEra Energy is targeting 10% dividend growth
Reuben Gregg Brewer (NextEra Energy): Looking at the energy sector from a broad perspective it includes boring utility stocks. But there's one utility stock that has proven it is anything but boring, at least on the dividend front, and that's NextEra Energy. This industry giant, with a market cap of $122 billion, has increased its dividend annually for 29 years and at a compound annual rate of 10% over the past decade. Those would be impressive stats for any company, let alone a utility.
The key to NextEra's success is that it is really two companies in one. The foundation is NextEra's regulated utility operations, which largely consists of Florida Power & Light. This is a slow and steady performer benefiting from operating in a state that's seen steady population growth. Regulated assets have monopolies in the areas they serve but must get the rates they charge and their investment plans approved by the government. While this generally leads to slow growth, that growth is fairly dependable regardless of the market environment.
On top of this slow and steady business, NextEra has built one of the world's largest clean energy companies. This business is expected to keep growing for years as the world shifts toward renewable power. To provide some scale to the opportunity, NextEra's renewable power business has 34 gigawatts of capacity today with plans to increase that by as much as 41 gigawatts by 2026.
At this point, management expects to increase the dividend by 10% at least until 2024 with earnings growth of between 6% and 8% a year expected through at least 2026. Meanwhile, the dividend yield is historically high today at 3.1%, suggesting the stock is on sale.
The power to continue growing in 2024
Neha Chamaria(Brookfield Renewable): Despite regaining some ground in recent weeks, shares of Brookfield Renewable have hugely underperformed the market in 2023. Rising interest rates are largely to blame as they can hinder plans for companies like Brookfield Renewable that bank on cheap debt to fund growth. The market's fears were exacerbated when Brookfield's peer NextEra Energy Partners slashed its growth targets in September, citing funding challenges in a high interest rate environment.
Yet, Brookfield Renewable hasn't stopped growing, and the drop in the renewable energy stock's price makes it an enticing energy stock now. In the nine months that ended Sept. 30, Brookfield's funds from operations (FFO) grew 7.7% year over year. Management didn't mince words, stating that it wasn't pleased to see its share price fall. Management's outlook for the business, however, is better than ever, and it remains focused on long-term growth.
It also sees plenty of opportunities to deploy capital at or above its target returns as demand for clean energy continues to rise even as several market participants find it harder to access capital amid high interest rates. In other words, Brookfield Renewable may not cut back on its growth spending in the near term, contrary to what the market fears.
Driven primarily by its development pipeline and acquisitions, Brookfield Renewable grew its FFO per unit by 10% annually over the past decade and is targeting a similar 10% or more annual FFO growth rate through 2028. It also expects to increase its dividend by 5% to 9% annually, hoping to deliver 12% to 15% total returns to shareholders. With Brookfield Renewable shares yielding 5%, investors who buy the stock now can expect strong returns in the long term.
There's lots of optionality heading into 2024
Matt DiLallo (Kinder Morgan): Kinder Morgan's energy infrastructure business generates very stable cash flow. The company gets two-thirds of its earnings from take-or-pay contracts and commodity-priced hedges, which lock in its cash flow. Meanwhile, another 26% is fee-based earnings with no commodity price exposure. That gives Kinder Morgan lots of visibility into its cash flow.
The pipeline giant expects to produce about $5 billion, or $2.21 per share, of distributable cash flow next year. That's 5% above what it anticipates producing this year. That predictability gave Kinder Morgan the confidence to increase its already high-yielding dividend (recently 6.4%) by another 1.8% for next year, extending its streak to seven straight years of dividend growth.
While its contracts lock in most of its cash flow, the company has lots of upside potential. Its current financial expectations don't include any impact from STX Midstream. The company recently agreed to buy the natural gas pipeline operation from NextEra Energy Partners in a $1.8 billion deal. It anticipates that the transaction will be accretive to its cash flow in 2024 and beyond.
Meanwhile, it has a lot of financial flexibility even after completing that sizable transaction, which should close in the first quarter of next year. Kinder Morgan is currently on track to end 2024 with a 3.8 times leverage ratio, well below its 4.5 times target. While the company will use some of its financial capacity to close the STX Midstream deal, the transaction will only increase its leverage ratio by 0.1 times next year while being leverage-neutral over the long term.
That gives Kinder Morgan lots of financial flexibility heading into 2024. It can opportunistically deploy that capacity on share repurchases, value-enhancing acquisitions like STX Midstream, and sanctioning additional high-return organic expansion projects. Future capital deployment could further boost its cash flow per share, giving Kinder Morgan more fuel to grow its dividend.
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Matthew DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, Kinder Morgan, NextEra Energy, and NextEra Energy Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield Renewable, Kinder Morgan, and NextEra Energy. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
