Who Would Benefit From A 'Green New Deal'?

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Includes: ANDE, BEP, BIP, CAT, CVA, CWEN, DE, EVA, FAN, GE, GEX, GPRE, HASI, ICLN, IFRA, IYE, JCI, NEE, NEP, NUE, PBD, PEGI, PZD, QCLN, TAN, TERP, VDE, VWDRY, XLE, YLCO
by: Cashflow Capitalist
Summary

The near-future implementation of a "Green New Deal" might be more likely than most people think.

The proposed legislation has seven overarching goals and a very optimistic ten-year time horizon.

Certain publicly traded companies would benefit greatly from a Green New Deal.

Here are some of those companies and how they would benefit.

The idea of a "Green New Deal" (or GND) is not new. Jill Stein of the Green Party promoted it in her 2016 presidential campaign. Before that, Thomas Friedman proposed it in a 2007 New York Times article, being the first to use the term. And Ralph Nader presented a similar idea, although without using the term, when he ran on the Green Party ticket in 2000.

Today, the notion of a Green New Deal is being endorsed by most 2020 Democratic Presidential candidates, such as Elizabeth Warren, Cory Booker, and Bernie Sanders. But its primary champion is the freshman Congresswoman Alexandria Ocasio-Cortez. She has articulated the most specific vision of its implementation and defended it with the most vehemence.

Ocasio-Cortez exemplifies the progressive Left's mixture of starry-eyed optimism and clenched-jawed determination. She acknowledges the difficulty of the task ahead but brushes aside the pragmatists' objections with a flick of her wrist. Her chief of staff, Saikat Chakrabarti, compares the scope and challenge of implementing a GND with JFK’s declaration that we would go to the moon in ten years. Many technologies and even industries needed to get to the moon did not yet exist, but America determined that we would do and invent whatever it took to achieve the goal.

It may be easy for the unpersuaded to dismiss her ideas, but it would be unwise to downplay the possibility that they will be tried in the near future.

With a sub-40% approval rating, Donald Trump's odds of retaining the White House after the 2020 election, according to the political prediction website, PredictIt, are around 30%. (Of course, the website’s users gave Trump around the same odds prior to the 2016 election, and we all know how that turned out.) With gridlock in Washington, a lingering special investigation into Russia collusion, and a constantly active presidential Twitter account, it's difficult to see what catalyst could shore up Trump's chances.

In any case, the nature of our two-party system is such that when the pendulum swings to one side for a while, voters come to realize that the lavish promises made by the winning side are not actually feasible. The idyllic world pledged to the people either wasn’t politically workable or would never have come about from those policies to begin with. Gradually, the swingable voters lean back toward the message of hope and change being articulated by the other side.

The “other side” in 2020, or perhaps 2024, will be the Democrats. When the pendulum swings back their way, they will have the political capital, even if only for a short time, to do as they wish. They almost certainly will not be able to do everything they wish, but they’ll be able to do some things. Right now, a Green New Deal seems to be one of the most likely legislative pushes that will be made by the insurgent progressive wing of the party, especially if the US falls into a recession in the next few years. Thus, it’s safe to assume that at least some movement toward a GND is probable.

The goal of this article is not political commentary. Some will view a Green New Deal favorably, some unfavorably. One person's utopia is another person's dystopia. I have my own personal opinion about the proposed GND, which I’d like to think is reasonable and nuanced, but this is not the forum for a political discussion. The purpose of the present article is to identify stocks that would benefit from such a program. More specifically, in keeping with my personal investment goal of a safe and growing income stream, we’ll look at dividend-paying companies that could stand to benefit from a Green New Deal.

The Seven Goals of the Green New Deal

The draft text of the proposed legislation gives seven relatively broad goals that a GND would seek to achieve over a ten-year timespan. Let's first list all seven, then go through each one and try to identify dividend-payers that would benefit. Here are the seven overarching goals:

1. Dramatically expand existing renewable power sources and deploy new production capacity with the goal of meeting 100% of national power demand through renewable sources;

2. building a national, energy-efficient, “smart” grid;

3. upgrading every residential and industrial building for state-of-the-art energy efficiency, comfort and safety;

4. eliminating greenhouse gas emissions from the manufacturing, agricultural and other industries, including by investing in local-scale agriculture in communities across the country;

5. eliminating greenhouse gas emissions from, repairing and improving transportation and other infrastructure, and upgrading water infrastructure to ensure universal access to clean water;

6. funding massive investment in the drawdown of greenhouse gases;

7. making “green” technology, industry, expertise, products and services a major export of the United States, with the aim of becoming the undisputed international leader in helping other countries transition to completely greenhouse gas neutral economies and bringing about a global Green New Deal.

(1) Dramatically expand existing renewable power sources and deploy new production capacity with the goal of meeting 100% of national power demand through renewable sources.

Considering that renewables currently account for only about 20% of US electricity generation, there is substantial work to do in this area.

Source: U.S. Energy Information Administration

The growth of utility-scale renewable energy production would need to rapidly accelerate, beginning immediately upon implementation of a GND. And if coal use continued to be abandoned at the rate achieved over the last ten years, it would take at least two decades to eliminate it completely, so coal plant retirements would need to accelerate. Natural gas would have to pick up the slack, as it has been doing, despite the goal of 100% renewables. Discontinuing coal and natural gas (much less coal alone) in a decade is probably not possible.

But let's say that, according to the directives of the GND, we tried. Demand for renewable assets such as those owned by TerraForm Power (TERP) and Pattern Energy Group (PEGI) would skyrocket. Both companies own solar and wind farm assets, though TERP is weighted toward solar and PEGI is weighted toward wind. Currently, both companies are paying out nearly all the cash they have available for distribution and have high yields to show for it, but in a GND scenario, their assets would become more valuable and would accordingly fetch a higher premium, thus increasing cashflow.

Another likely beneficiary would be Enviva Partners (EVA), producer of wood pellets that can be used to replace coal in power plants. The company has raised its generous distribution since its inception in 2015, but it is a pass-through company, meaning that it issues a K-1 form at tax time. Another potential beneficiary would be the ethanol sector, with such names as Green Plains (GPRE) and The Andersons, Inc. (ANDE) leading the way.

Lastly, the pass-through company, NextEra Energy Partners (NEP), would surely benefit tremendously from rapid growth in demand for utility scale renewables. Sponsored by the Florida utility giant, NextEra Energy, Inc. (NEE), NEP has multiple irons in the fire, including wind and solar power as well as natural gas pipelines. Combine management's recent affirmation of a 12-15% annual distribution growth rate until at least 2023 with the fact that NEP is currently paying out less than a third of its CAFD, then add a potential GND scenario on top of that and you have one very attractive opportunity.

(2) Building a national, energy-efficient, “smart” grid.

All of the above stocks would seem to benefit from a national smart grid.

(3) Upgrading every residential and industrial building for state-of-the-art energy efficiency, comfort and safety.

The amount of upgrading needed for this goal to be achieved is gargantuan and could provide sizable returns to companies that provide the requisite services. Clearway Energy (CWEN) is a prime example. The company operates renewable generation assets and provides thermal infrastructure to buildings for commercial businesses, universities, and hospitals. Surely their services would be useful in upgrading the energy efficiency of America's buildings.

Likewise, Johnson Controls International (JCI), which provides building improvement services for HVAC, ventilation, security, fire detection, and energy storage, among other things, would likely benefit.

Covanta Holding Corporation (CVA), which takes trash and converts it into usable energy, would also likely benefit as buildings' waste disposal systems are rethought.

Probably the most direct beneficiary would be Hannon Armstrong Sustainable Infrastructure (HASI), which invests 22% of its portfolio in building efficiency solutions. The company provides financing and services to governments and corporations, focusing on energy efficiency, renewable energy, and sustainable infrastructure. The building improvements they provide include "upgraded lighting, thermostats, air conditioning systems, water fixtures and insulation."

(4) Eliminating greenhouse gas emissions from the manufacturing, agricultural and other industries.

HASI may be able to benefit from this as well.

(5) Eliminating greenhouse gas emissions from, repairing and improving transportation and other infrastructure, and upgrading water infrastructure to ensure universal access to clean water.

Steel producer Nucor Corporation (NUE), just five years away from becoming a dividend king (50+ years of dividend growth), would surely benefit from the rebuilding and repairing of bridges, highways, ports, and subway systems. As would construction machinery manufacturers Deere & Company (DE) and dividend champion Caterpillar (CAT).

And such a massive national project of repairing America's infrastructure would surely provide more buying opportunities for global infrastructure asset owner Brookfield Infrastructure Partners (BIP), a pass-through company with ten years of distribution growth under its belt.

Of course, if one didn't want to pick and choose individual companies, the iShares U.S. Infrastructure ETF (IFRA) would provide exposure to this sector, albeit with a much more modest yield of ~2.3%.

(6) Funding massive investment in the drawdown of greenhouse gases.

It's difficult to predict which dividend payers, if any, would benefit from this goal. Among non-dividend payers, however, the companies in the Invesco Cleantech ETF (PZD) would likely benefit greatly. Around 58% of them are American.

(7) Making “green” technology, industry, expertise, products and services a major export of the United States, with the aim of becoming the undisputed international leader in helping other countries transition to completely greenhouse gas neutral economies and bringing about a global Green New Deal.

Other countries would surely follow in the United States' footsteps if we embarked on such a massive program.

Thus, exposure to global renewable power companies like Brookfield Renewable Partners (BEP) would seem a good idea. Or, for increased diversification in exchange for decreased total return, one could choose the Global X YieldCo & Renewable Energy Income ETF (YLCO).

Conclusion

A GND, much like Barack Obama’s massive fiscal stimulus package, would be readily supported by plenty of corporations. Indeed, it would produce just as much of a special interest feeding frenzy as the stimulus package did as companies dispatch their lobbyists to Washington in order to secure the biggest and best federal contracts. Some progressives and libertarians would crow about this cronyism, but the powers that be would have no choice but to use some established company or another. Where else would the technology, skill base, and capital come from in order to accomplish their goals?

And, as in the Obama stimulus package, some international green tech companies would be able to sneakily hop a ride on the gravy train along with US-based companies. Most of the stimulus package's reimbursements for new wind farms built in the US, for instance, went to companies based outside the US. That would likely happen again in the case of a GND. If Danish wind turbine manufacturer, Vestas (OTCPK:VWDRY), for instance, offers a better deal or superior product than American turbine producer, General Electric (GE), we shouldn't be surprised if the foreign producer gets the contract.

In any case, opportunistically adding exposure to renewable energy stocks during President Trump's tenure, however long it may be, could richly reward investors after he leaves office. The energy and enthusiasm on the Left is not concentrated in the moderates or centrists. There's little purchase among the base for reaching across the aisle, and the base are the ones who will choose the next Democratic presidential candidate. If nothing else, then, renewable energy stocks can be thought of as a hedge against political uncertainty.

What do you think? Have I neglected to mention any companies that might benefit from a Green New Deal?

Disclosure: I am/we are long BIP, BEP, NEP, HASI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.