Renewable energy is taking share from fossil fuels around the world. Aging coal plants and a growing global middle class are accelerating deployments of wind and solar, while falling energy storage costs and improving technologies are making renewables more viable for meeting more of the world’s energy needs. Yet many renewable energy stocks look way ahead of their near-term prospects, coming out of a year that saw many wind and solar stocks crush the market’s gains.
But that doesn’t mean the good times are over — at least not for every renewable energy stock, including Clearway Energy (NYSE:CWEN) (NYSE:CWEN.A), which delivered well over 60% in total returns for shareholders last year. On the Dec. 21 edition of “The Wrap” on Motley Fool Live, host Jason Hall made the case for Clearway as being worth buying now and picked it as one of his top stocks for 2021 and beyond.
Jason Hall: Okay. I’m going to go to something that’s old school and pretty comfortable for me to talk about, but I think it’s easy to overlook the prospects for a company like Clearway Energy, ticker CWEN.
I’m going to do a screen share here. You look at Clearway Energy and the stock’s up, so there’s two different share types — there’s CWEN and CWEN.A. The differences is the .A shares, they’re nonvoting shares so they usually trade for a little bit lower price. But you see compared to the S&P 500, its crushed it this year. It’s absolutely crushed it.
So Clearway Energy is a company that produces renewable energy; wind and solar are their main sources of revenue. They also own some natural gas. I’m going to show a little bit longer-term track here. Just talk about the Brian’s points, when he was talking about similar, where if you have large exposure risk. This is something that Clearway went through, if not in reality then in perception.
What you see here, this is the dividend that Clearway Energy paid. You follow that chart and you see right through the end of 2018, the dividend was on the steady climb higher and higher and higher every year, and then fell off a cliff. There’s a huge slash in the dividend that happened to correspond with the bankruptcy proceedings of Pacific Gas and Electric. Now, Pacific Gas and Electric makes up at the time somewhere between 10% and 15% of Clearway’s revenues.
So that seems like it’s a pretty small amount, but something happened with Clearway and I’m going to exit the screen share here with the bankruptcy proceedings for PG&E. That was a large amount of Clearway cash that was at a subsidiary company was tied to PG&E. The bankruptcy judge locked all that down, and that cash had to sit at the subsidiary and was no longer available for distribution to Clearway investors. The dividend got absolutely slashed.
From the very beginning, Clearway’s management was saying, “Once the bankruptcy plays out, this is going to be fine. The material risk is minimal at best, these are high-quality contracts.” So there wasn’t risk that the contracts were going to get voided by the bankruptcy judge. They weren’t some sweetheart deals. They were market-rate deals. Clearway’s management was saying, “Once we get through this, everything should come out the other side just fine.” You see the dividend didn’t go all the way back up to the peak but was increased enormously earlier this year.
Needless to say, that’s one of the things that drove the stock price so much higher is what management said would happen happened. PG&E came through bankruptcy. Clearway’s cash flows returned to normal. That’s good. That says OK, the business is strong, the business is fine now.
What about going forward? What’s the opportunity? Again, this is a company that generates its cash flows, generating renewable energy primarily from wind and solar. Wind and solar technologies continue to get cheaper every single year. Clearway is going to be a leader in deployments of new wind and new solar all around the world, not just in North America, but all around the world to meet the energy needs of a growing middle class, to replace coal as coal facilities get retired. In a lot of places, nuclear has lost its luster, so renewables are more appealing than nuclear. And in lot of the world, it’s even cheaper than natural gas.
So the technology is heavily in Clearway’s favor. The model is also changed for a lot of utility companies, where they’re prioritizing signing contracts to buy power instead of investing billions of dollars of their own capital to build out power plants. All of those things line up in Clearway’s favor. Clearway is controlled by Global Infrastructure Partners, which is a large privately held infrastructure investing company. They are very, very good at what they do. Clearway is the vehicle they use once they’ve developed these different renewable properties to sell them to Clearway. Clearway monetizes them, takes on debt, and then takes a lot of that cash flow and pays us back to investors.
I really like this company a lot. The dividend yield is about 3.5% right now. I think now that we’ve moved through that PG&E bankruptcy, over time, its exposure to that single customer is going to continue to get smaller. I think investors that buy Clearway are going to be able to get not just market-beating results next year, but I think over the next 20 years. So big fan of Clearway Energy, ticker CWEN.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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