Individual investors with a long-term mindset who are eager to inject a little growth into their portfolios shouldn't overlook the emergence of clean energy technologies.
Consider that in the five-year period from 2014 to 2018, the amount of electricity generated from wind power and solar power assets soared 51% and 232%, respectively, in the United States. The duo account for 10% of the country's total electricity consumption, although that's expected to climb to 13% by 2020. Throw in the expected surge in hybrid and electric vehicles (EVs), and both electric power and ground transportation promise to become much more climate-friendly in the coming decade.
Those trends help to explain the ambitious growth plans of Pattern Energy (PEGI), a globe-spanning renewable power asset manager, and Albemarle (ALB 0.31%), the world's largest lithium producer. But which clean energy stock is the better buy?
Image source: Getty Images.
The matchup
Pattern Energy generates income by acquiring equity stakes in wind power projects and taking its share of the resulting cash flows from electricity sales. The business owns over 2,800 megawatts of wind power projects in North America and Japan and has the right of first refusal to another 923 megawatts of projects set to enter service by 2022. In addition to investing capital in new projects, the company has also started "repowering" existing projects, or tearing down the old turbines and erecting newer, more efficient, and more profitable ones in their place.
Investors are eager to see the growth investments pay off. After generating $167 million in operating cash flow in 2018, Pattern Energy is aiming for approximately $175 million in 2019. Growing cash flows will be important to improve the financial sustainability of the company, which paid out 99% of cash flow as a dividend last year. Management wants to get that down to about 80% by the end of 2020 before committing to further increases, although the current annual yield of nearly 8% is quite generous for patient investors.
Albemarle doesn't have the problems that come with a sky-high dividend yield (shares currently sport an annual yield of 2.3%), although the lithium producer is also trying to convince investors that its ambitious growth plans will succeed. The company ended last year with 65,000 metric tons of lithium carbonate equivalent (LCE) of annual production capacity, but expects to ramp output to 165,000 metric tons on the same basis by 2021 and up to 350,000 metric tons shortly thereafter.
The business is racing to meet a surge in expected demand from global automakers rapidly turning over their fleets to hybrid vehicles and EVs. Despite laying out long-term purchase commitments from customers that appear to support the enormous step-up in production, Albemarle has failed to earn a higher valuation from Wall Street.
Image source: Getty Images.
By the numbers
Both Pattern Energy and Albemarle have ambitious growth plans and a solid idea of how to achieve them. While success will largely be determined by execution, investors eager to differentiate the two today might turn to financial metrics. Here's how the clean energy stocks stack up against one another:
|
Metric |
Pattern Energy Group |
Albemarle |
|---|---|---|
|
Five-year total return (share performance plus dividends) |
4.8% |
10.3% |
|
Market cap |
$2.2 billion |
$7.8 billion |
|
Dividend yield |
7.9% |
2.3% |
|
Forward P/E |
N/A |
10.9 |
|
N/A |
0.85 |
|
|
Enterprise value to EBITDA |
17.4 |
9.7 |
Data source: Yahoo! Finance, Ycharts.
For reference, the S&P 500 has delivered a five-year total return of 64%, so shares of both companies have underperformed the market by a wide margin in recent years. Pathetic recent returns aside, investors can see that Pattern Energy Group and Albemarle have little else in common.
The wind power leader's business model means it routinely reports negative net income, but it's a complicated issue with adjustments and subsidiaries taking on much of the financial impact of the losses. And because cash flows are king for the business, that's mattered surprisingly little to investors more interested in an 8% dividend yield. The lithium producer has a more traditional financial situation -- and it sports attractive valuations based on expected earnings and future growth potential.
The difference in business models also plays a role in the divergent EV-to-EBITDA ratios. However, it's worth noting that a large debt balance comes with hefty interest expenses for Pattern Energy, which spent $107 million on interest payments in 2018. That's a significant drag on cash flow and the ability to grow the dividend.
The better buy is...
Investors don't see an 8% dividend yield often. While that's attractive for income portfolios, it's important to remember that shares have returned just 4.8% in the last five years with dividends included. Pattern Energy could succeed with its near-term growth strategy, but the business model comes with unique risks.
That makes Albemarle the better buy in this matchup. It has an easier-to-follow business and is the world's largest lithium producer -- a label that figures to be incredibly valuable in the 21st century. Importantly, the stock is attractively valued right now thanks to the persistent near-term thinking on Wall Street.
