I think investors are currently spoilt for choice when it comes to buying the best renewable energy shares. There is now a whole range of companies listed on the London Stock Exchange specialising in everything from hydroelectric power to energy storage and more experimental hydrogen energy. I can buy any of these organisations for my portfolio to gain exposure to the sector today.
However, one company stands out to me as being a leader in the sector. That is utility giant SSE (LSE: SSE).
Renewable energy shares
When looking for renewable energy shares, I try to look past the company’s current operating environment and focus on its future potential. For many businesses, it is difficult to assess how they will grow and develop over the next few years, but SSE has laid out a plan.
The group is preparing to invest £12.5bn in renewable energy and other technologies by 2026. This fully-funded five-year plan represents a 65% increase in the company’s initial renewable spending targets.
The investment will effectively double the company’s renewable energy capacity, delivering 4GW of new green energy potential.
Management is not stopping there. By 2031, the group wants to increase its renewable energy output five-fold to 50TWh per annum.
If the group meets these ambitious goals, it will help deliver 25% of the UK’s 40GW offshore wind target and over 20% of the upcoming UK electricity networks investment throughout the period. That is a substantial contribution to the country’s electricity network.
And SSE thinks it can do all of this while still rewarding investors. The organisation is targeting annual earnings growth of 5-7% per annum to 2026.
SSE dividend cut
Unfortunately, in order to free up capital for investment, the group is planning to reduce its dividend. After its current inflation-linked dividend plan expires in March 2023, SSE will cut the payout to 60p. The firm believes growth of 5% per annum will be possible from this level from 2023 to 2026.
For its 2021 financial year, SSE declared a total dividend of 81p per share. As such, these numbers imply a dividend cut of 26%. This is disappointing, but I think swapping income for earnings growth is a worthwhile trade-off. The company is looking to return £3.50 per share for the five years to March 2026.
Considering the company’s ambitious growth targets and its expanding presence in the renewable energy space, I would buy the stock for my portfolio today, considering its potential.
However, I will be keeping a close eye on the risks that could weigh on growth as we advance. These include regulatory headwinds and competition in the renewable energy sector. High levels of competition could push up asset prices, making it harder for SSE to earn a sustainable return on its investments. Regulators could also limit the amount of money the group is allowed to earn from new investments.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.