The global economy is in the midst of transitioning its power source from fossil fuels to renewable energy. It will take decades and trillions of dollars to make that switch. That makes it a mega-trend that investors won’t want to miss because it has the potential to produce powerful returns.
One of the early leaders in this transition is utility Xcel Energy (NASDAQ:XEL). While the company currently has a carbon-heavy business, it was the first utility to pledge to be carbon-free by 2050. That strategy has the potential to produce attractive total returns in the coming years. Add that upside to its relative underperformance last year, and it stands out as one of the best renewable energy stocks for 2021 and beyond.
A renewable-powered growth plan
Xcel Energy is a utility holding company that operates electric and natural gas utilities across eight western and Midwestern states. At the end of 2019, the company got 26% of its power from coal, 33% from natural gas, 13% from nuclear, and 24% from renewables.
However, Xcel has a bold plan to reduce its carbon emissions by 80% in ten years and eliminate them by 2050. The company aims to achieve that first pledge by retiring its current coal power plant fleet and replacing them with cleaner power sources like natural gas and renewables. Xcel expects to invest $24 billion through 2025 toward this ambitious goal.
Thanks to falling costs, the returns it earns on these investments should help it grow its earnings per share at a 5% to 7% annual rate over the next few years. That should support a similar growth rate in its 2.7%-yielding dividend. Add it up, and the company could produce 8% to 10% total annualized returns from here, assuming no change in its valuation multiple.
A relatively attractive valuation
Xcel Energy’s earnings and dividend growth are only part of the draw. The other is its additional upside potential if the market rewards it with a higher valuation. That’s possible given its increasing focus on renewables. That has helped power rival utility NextEra Energy (NYSE:NEE) to new heights over the past year because the market has rewarded it with a higher valuation multiple as a result of its leadership in renewables:
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