It was only a few months ago that everyone was piling into green energy stocks. Prices climbed steadily as investors took the measure of U.S. President Joe Biden’s environmentally friendly agenda and envisaged billions of dollars in government support pouring into private companies.
Reality has now set in. The President faces major problems in getting his infrastructure bill through the Senate, and compromise talks have failed to bridge the divide between Republicans and Democrats.
Combatting the effects of climate change is one of the key focal points of the bill. This includes modernizing the power grid, support for electric vehicles, phasing out coal and gas electricity plants, and targeting renewable energy development.
We may yet see a scaled-down version of the plan reach the President’s desk, but with billions of dollars trimmed.
As the realization grew that the grand plan was in trouble, the price of green energy companies wilted. Not that there’s anything wrong with them – most are doing well. But their market values got ahead of themselves, and we’ve now seen a retreat to more sustainable levels.
That’s not an isolated case. TransAlta Renewables Inc. is down more than 20 per cent from its January high. Boralex Inc. is off 34 per cent. When a stock group gets ahead of itself, a correction is inevitable, although this one is more severe than most.
There is one bright spot. Lower prices have pushed yields higher.
Here are updates on two of the green energy companies recommended in the Income Investor newsletter.
- Type: Common stock
- Current price: $18.52, US$15.28
- Annual payout: 68.24 US cents
- Yield: 4.5 per cent
- Risk: Moderate
Comments: Algonquin’s share price is down about 18 per cent since its high last winter. This is despite the fact first-quarter results were better than expectations and the company announced a 10-per-cent dividend increase to 17.06 US cents a quarter (68.24 US cents annually). The combination of the dividend hike and the price drop pushed the yield to 4.5 per cent.
The dividend hike was supported in part by the continuing execution of Algonquin’s previously announced 1,600 mega watts renewable energy construction program, which is the largest in the company’s history. CEO Arun Banskota added, “Nearly 1,400 MWs have already been placed in service and the remainder are on schedule for completion by year-end. This will effectively double our portfolio of owned and operated renewables, underscoring our commitment to growth, operational excellence, and sustainability.”
Quarterly results were excellent across the board. Revenue for the period was US$634.5-million, up 36 per cent from the same period of 2020. Note that the company reports in U.S. dollars, although it is based in Canada.
Adjusted net earnings were US$124.5-million (20 US cents a share), up from US$103.3-million (19 US cents) last year. On a per share basis, that was a gain of 5 per cent.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was US$283-million, which was 3 per cent ahead of consensus.
The company continues to grow both organically and by acquisition. During the quarter, its Renewable Energy Group closed the acquisitions of a 51 per cent interest in three of the four Texas coastal wind facilities that it had previously agreed to buy. The Stella, Cranell, and East Raymond wind facilities are operational and represent 621 MW of the total portfolio. The fourth facility (West Raymond) is expected to achieve full commercial operations in the current quarter and have a generating capacity of 240 MW, for an expected total portfolio capacity of 861 MW.
The pullback in the share price and the dividend increase provides an opportunity to take a position in this well-run business at a reasonable price.
- Type: Common stock
- Current price: $20.48, US$16.81
- Annual payout: 72 cents
- Yield: 3.6 per cent
- Risk: Moderate
Comments: The share price is down about 37 per cent from its mid-winter high, the largest decline of any of the green energy stocks we follow. The company was hard hit by the February Texas storm that almost brought down the state’s entire electrical grid. The financial impact showed up in every aspect of the company’s quarterly report. All told, Innergex posted an impairment charge of $113-million related to Texas.
Revenues were down almost $55-million as a result of the storm, with EBITDA off by the same amount. Normalized revenue was $134.7-million, a 2 per cent increase from the same period in 2020. The company reported an adjusted net loss of $27.5-million (87 cents a share), compared with a loss of $9.5-million (35 cents) last year.
Despite the Texas setback, the company is moving ahead with the construction of new power projects. The Hillcrest solar project in Ohio is approximately 95 per cent complete. Tracker and module installation are nearly completed. Commissioning work started in December, and full commercial operation is scheduled for the current quarter.
Construction activities at the Griffin Trail wind project in northwest Texas are progressing well on site with completion of turbine deliveries, collection line installation, turbine foundations, and operations and maintenance building construction. Significant progress on turbine installation was also achieved. Mechanical completion and pre-commissioning of the turbines are continuing. Commercial operation is scheduled for the third quarter of this year.
In sum, the company appears to be recovering from the Texas disaster, but Algonquin’s superior yield makes it a better choice right now.
At this stage, I think the worst is probably over for the green energy stocks. They flew too near the sun for a while, but the current price levels look reasonable, and looking ahead, the sector will certainly grow. The question is, at what pace? Much of the answer depends on what happens in Washington.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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