Renewable energy stocks are the ultimate long-term investment. That’s because the future of energy on this planet has only two possible options. Politicians globally can accept the climate science, that the vast majority of fossil fuels must remain unmined by 2050. The alternative is that we continue to extract fossil fuels until it becomes commercially unviable in the next few decades.
Either way, it seems inevitable to me that renewable energy stocks are going to swiftly rise in value. As many are experimental, it also makes sense to me to buy a FTSE 100 powerhouse.
FTSE 100 stalwart
SSE (LSE: SSE) is my top renewable energy stock. With 9.1m customers, the company is the second-largest Big Six energy supplier in the UK. At 1,650p, its share price is now near the peak of 1,686p it struck just before the March 2020 crash. And year-to-date, it’s up over 7%.
The company has been on a mission to develop renewable energy for years now. And the pandemic has put environmental concerns and oil supply chain issues into renewed focus. I think these twin pressures are pushing renewable energy higher up SSE’s agenda.
It already generates around 4GW of wind and hydro power, and aims to treble renewable energy output between 2019 and 2030. Its long-term ambition is to achieve net zero emissions by 2050. To support this target, the company offers customers the opportunity to upgrade to its Go Green 100% renewable energy tariff, for just £3 extra per month.
In its recent Q1 trading statement, it set out a £4.1bn investment plan “to power communities to net zero.” And it plans to dispose of £2bn in assets that don’t fit with SSE’s net-zero strategy. It wants to use this capital to continue financing the world’s largest offshore wind farm at Dogger Bank. It also owns one of the largest European onshore wind farms at Viking on Shetland. And it already has the largest offshore wind development pipeline in the UK.
Renewable energy stock split?
Activist investor Paul Singer’s Elliott Investment Management has just called for a breakup of SSE into its regulated electricity and renewable divisions. Having built up a large stake in the company, this strategy will come as no surprise to anybody watching the stock closely. Elliott has taken similar action in the past. In 2019, it pushed EDP-Energias de Portugal SA to spin off a renewable energy arm. And the share price in the new business has tripled over the past four years. An Elliott-backed SSE stock split could easily be profitable to existing shareholders.
Potentially undervalued
With a market cap of £17.2bn, the FTSE 100 renewable energy stock also pays a reliable 5% dividend, which it plans to maintain until at least 2023. And RBC Europe analyst John Musk believes that SSE is “undervalued at current levels” but that it will “be some time before anything potentially materializes from the situation.”
There are risks though. As it stands, SSE has its prices limited by OFGEM. While the regulator is allowing a price cap increase of £139 this year, SSE is likely to come under increasing regulatory pressure to justify any price hikes during the current economic turbulence. And it has high levels of debt to finance its ongoing expenditure. But it’s still a renewable energy stock I’d buy for my portfolio right now.
