Yesterday I named AES (AES) as my seventh pick in my Special Report: 10 Global Warming Stock Picks on my subscription JubakAM.com site. I also added the utility stock to my Dividend Portfolio on all three of my sites. Hence this post.
I wrote: “Reducing electricity generation from coal is the biggest low hanging fruit that I can see for reducing global warming. The impact would be huge. Coal is the single biggest contributor to global warming. The burning of coal is responsible for 46% of carbon dioxide emissions worldwide and accounts for 72% of total greenhouse gas emissions from the electricity sector.And while huge obstacles still exist (especially energy policy and investment in India and China) there is some momentum to help drive substitution of renewables for coal. In 2018, of the first time ever, the number of coal-fired power plants operating around the world fell as older plants were retired and the constitution of new plants fell since it is now cheaper in many parts of the world to build and operate new wind and solar plants than to build and operate new coal-boring power plants. As an investor what I’ve like to find is a utility with a lot of coal-fired assets that is in the middle of a big push to replace them with renewables. Which pretty much describes AES’s Green Blend and Extend strategy launched in 2018 by the utility’s generating arm AES Gener (67% owned by AES.) The strategy aimed at negotiating extensions to existing power purchase agreements with customers, many of them multinational corporations, that had contracted with AES Gener’s coal-fired power plants in Chile and hydroelectric facilities in Colombia. Those long-lived contracs would give AES Gener the revenue certainty to invest in new wind farms and solar plants. Since 2018 AES Gener has signed approximately 1.7 gigawatts of new solar and wind power purchase with contract durations of 10-21 years. Agreements have included Google and international mining and chemical companies, including Teck, Mantos Copper, Candelaria, Gensa, Ecopetrol, Pucobre, and Quimpac. On April 17, AES Gener shareholders approved a $500 million capital increase to provide for a $1.8 billion investment for the solar and wind projects. AES will provide $335 million, 67% of the capital increase, to maintain its level of ownership in AES Gener. In 2017, about 23% of AES Gener’s 5.8 GW of capacity was renewables, mostly hydroelectric. By 2024, the company expects that proportion to have grown to 50%. AES expects generation from coal to fall to less than 30% by the end of 2020 and decline to less than 10% by 2030. AES has a company structure that requires a significant amount of earnings to be retained at the subsidiary level in individual markets. That makes using a measure such as PE misleading as a metric. (The trailing 12-month PE is 62, startlingly high for a utility.) A more useful way to track the company’s growth and value is through its dividend history. The company reinstated a dividend in the fourth quarter of 2012 after an absence of 20 years. The company doubled its dividend in 2015 and then grew the dividend by 8% to 10% annually through 2018. The increase was 5% in 2019 and 5% in the first quarter of 2020. All those increases are still estimated to bring dividend payouts to a very low 51% of parent company cash flow this year. Revenue has suffered during the coronavirus pandemic but Morningstar project that cash flow will grow by 7% annual over the next five years, which should let the company continue to grow dividends by 5% a year. As of August 10, I’m adding these shares to my Dividend Portfolio. They currently pay a 3.34% yield. The shares closed at $17.59 today August 10. Morningstar calculates $20 as fair value.
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