Should I buy this FTSE 250 renewable energy stock?

With the rise in renewable energy directives, Jabran Khan delves deeper into this FTSE 250 stock to see if it could be a good stock to buy.

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With the rise in directives from governments to cut carbon footprints, FTSE 250 incumbent Drax Group (LSE:DRX) is one of a number of renewable energy stocks on my radar. Let’s take a closer look at it to help me decide if I would add the shares to my holdings.

Renewable power generation

As a quick reminder, Drax Group is a UK-based business involved in renewable power generation and selling this electricity to businesses. It has four assets in the UK and also has a global bio energy supply business with facilities across the US and Canada with customers in Europe and Asia.

So what’s been happening with the Drax share price? Well, as I write, the shares are trading for 664p. At this time last year, the shares were trading for 442p, which is a 50% increase over a 12-month period.

Risks involved

Firstly, the capital outlay and investment needed to ensure successful operations and energy production is significant. Drax has pumped billions into its technology and infrastructure already. With any investment there is a risk it may not pay off. Furthermore, although renewable energy is rising in popularity, there is no surefire method or practise that is accepted. Drax could be investing in the wrong things.

Another issue I have is Drax’s current strategy and biomass pellet business. Drax has invested billions into the, biomass pellet arm of the business, which it sells throughout the world. There is a risk that these pellets could be reclassified. If this were to happen, there could be a negative effect on its green credentials, as well as its balance sheet.

A FTSE 250 stock I’d buy

There is lots to like about Drax, in my opinion. Firstly, the state of the current energy market, has shone a new light on firms like Drax that provide renewable alternatives. I believe energy is a defensive sector. After all, everyone needs power to be able to run homes and businesses. Drax has defensive aspects. I would go further and say Drax has the potential to become a renewable energy leader in the coming years.

Next, Drax shares look good value for money at current levels on a price-to-earnings ratio of just seven. The shares also pay a dividend, which would boost my passive income stream. Drax shares currently yield close to 3%. This is just above the FTSE 250 average dividend yield. It is worth noting that dividends can be cancelled at any time.

So what about recent performance? Well, Drax has a good record of consistently recording revenue and profit growth in recent years. I do understand that past performance is not a guarantee of the future, however. Aside from 2020, which was affected by the pandemic, Drax has grown revenue and profit year on year since 2018. The rising popularity of renewable energy alternatives could mean this upward trajectory of performance growth could continue.

I would add Drax shares to my holdings and keep a hold of them for the long term, which is a core part of my investment strategy. I believe the rewards outweigh the risks currently.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jabran Khan 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.

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