There are hundreds of publicly traded companies out there. Because of that, it's impossible to know every one of them. That can cause investors to miss out on some underrated opportunities.
We asked some of our energy contributors for their favorite overlooked energy stocks. Here's why they think investors should put Hannon Armstrong Sustainable Infrastructure Capital(NYSE: HASI), Delek Logistics Partners (NYSE: DKL), and Algonquin Power & Utilities(NYSE: AQN) on their radar.
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Well-backed loans
Reuben Gregg Brewer (Hannon Armstrong): Hannon Armstrong is playing an important role in the clean-energy revolution. It is technically a mortgage real estate investment trust (REIT), but that's a terrible description of what the company does. Hannon Armstrong makes loans, but they are backed by clean-energy assets, like solar and wind farms. Those assets, meanwhile, are generally backed by long-term contracts, so there's very good visibility on the REIT's likelihood of being paid.
So why is the stock down nearly 40% from its late 2021 highs? The answer boils down to investor sentiment, which has soured on clean-energy stocks, taking Hannon Armstrong along for the ride. That has pushed the REIT's dividend yield up to 4%, which is fairly attractive relative to the 1.3% on offer from the S&P 500 Index and the 2.2% from the average REIT, using the Vanguard Real Estate Index ETF as a proxy.
But what's most telling here is that Hannon Armstrong increased its dividend in the first quarter. That's the fourth annual hike in a row. Moreover, the REIT inked $331 million worth of deals in the first quarter, up from $188 million in 2021, helping to increase its total portfolio size by 28% year over year. Distributable earnings rose 21% over the same period in 2021.
This is not a company that's struggling; it's still in growth mode. In fact, management reiterated that it expects annualized distributable earnings growth of 10% to 13% through 2024. This isn't your typical energy company, but you still might want to take a closer look just the same.
Quietly racking up an impressive growth streak
Matt DiLallo (Delek Logistics Partners): Delek Logistics Partners doesn't get enough credit for its success over the years. The relatively unknown master limited partnership (MLP) has increased its quarterly distribution for 37 straight quarters. That's an impressive growth streak considering that most of its peers have had to reduce their payouts at least once due to the sector's volatility.
The MLP's distribution growth streak isn't likely to end anytime soon. This year, Delek is seeing strong momentum fueled by higher commodity prices, driving drillers to boost their activity levels. That's pushing higher volumes through its gathering systems while supplying it with new growth opportunities. On top of that, its parent, refinerDelek US Holdings, doesn't have any major maintenance projects this year that would impact its volumes.
Meanwhile, Delek Logistics Partners' agreed to acquire 3Bear Delaware Holdings, which should immediately boost its cash flow.
On the other side of the equation, Delek Logistics Partners has a strong financial foundation to support its distribution while growing its business. It has a solid distribution coverage ratio of 1.21 times, enabling it to retain cash to fund expansion projects. On top of that, it has a low leverage ratio of 3.3 times, giving it the flexibility to make deals like 3Bear.
With a rock-solid financial profile and the fuel to keep growing its distribution -- which yields an attractive 7.4% -- Delek Logistics Partners is an under-the-radar energy stock that income-focused investors won't want to overlook.
This 5% yield looks sustainable
Neha Chamaria(Algonquin Power & Utilities): Algonquin is perhaps one of the most overlooked utility stocks out there.
Founded in 1988, Canada-based Algonquin owns more than $16 billion in assets today. Unlike most utilities that generate and supply electricity and gas, Algonquin is a diversified player that distributes electricity, gas, and water, as well as wastewater collection services to more than 1 million customers in North America. The company also has a growing renewables arm with solar, wind, and hydropower assets.
After acquiring New York American Water Company from American Water Works for $608 million earlier this year, Algonquin is all set to buy Kentucky Power Company and Kentucky Transmission Company from American Electric Power for nearly $2.9 billion by mid-2022.
These moves are part of Algonquin's plans for $12.4 billion in capital spending between 2022 and 2026, which it believes should help it grow adjusted earnings per share (EPS) at a compound annual rate of 7% to 9% over the period. Nearly 30% of that capital spending will go to its renewables business.
As its adjusted EPS grows, so should dividends. Historically, Algonquin has increased its payout at a compound annual rate of 10% between 2010 and 2020. That's about as solid as it can get, and I expect the company to continue rewarding shareholders with higher dividends year after year. In fact, Algonquin increased its dividend by 6% just last week, marking its 12th consecutive year of dividend increases.
I find this company's capital spending plan encouraging, and going by its dividend growth and strong foothold in the high-potential renewable energy industry, I think this 5%-yielding stock deserves a spot on your radar.
10 stocks we like better than Hannon Armstrong Sustainable Infrastructure Capital
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Matthew DiLallo has no position in any of the stocks mentioned. 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 Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
