McMurtry Investment Report Newsletter – December 2019

This is a very diverse industry that is clearly differentiated from fossil fuels. This industry is characterized by energy generated from renewable sources like hydro, solar, wind and geothermal.

Domestically renewable energy supplies 17% of our total energy production. This compares favourably to a world average of 13.4%. Wind and solar are clearly the fastest growing segments of this industry despite political intervention by Ontario’s Ford government.

Globally Canada only supplies 3% of the world production of renewables compared to 14% for China, 8% for the US and 11% for India.

In Canada hydro power represents the largest source of renewable energy at 67.1% with biomass of wood waste at 23.1%, solar at 0.7% and wind at 5.3%.

Biomass derived from both living organisms and through co-generation of pulp and paper waste is another very important component of this industry.

The fastest growing source of renewable energy globally is wind where it supplies 4% of Canada’s electricity needs. Globally China provides 36% of the world’s supply of electricity derived from wind with the US and Canada at 16% and 2% respectively.

The solar industry is also growing at a fast pace. Currently China supplies 35% of the global capacity of solar energy with Canada and the US at 1% and 12% respectively.

Compared to fossil fuels, renewable energy is cleaner, better for the environment and more sustainable. Historically the cost differentials have been much higher for non hydro renewable energy than for fossil fuels. However, in recent years all this has changed. Price differentials are minimal at best depending on the renewable energy source while industry subsidies have greatly diminished and have even been eliminated in some cases. Globally over the next year 75-80% of new wind and solar projects will produce electricity at lower prices than the cheapest new coal and oil and gas options.

Industry employment growth in Canada has generated up to 50% more jobs than fossil fuels over the last several years.

In the future renewable energy will be providing most of the electricity for home heating in addition to most plants and warehouses. Despite our country’s pre-occupation with fossil fuels the real growth will be derived from other sources than hydrocarbons.

There was a recent new law just passed in France where all new roofs of commercial buildings must be covered either in plants or solar panels.

Scotiabank has just announced a $100 billion proposed investment in renewable energy by 2025.

There are many companies involved in this industry that are worthy investment candidates.
In my investment portfolios I have selected Algonquin Power, Northland Power and Fortis. All three are growing nicely. Both Fortis and Algonquin are suppliers of both renewable and non renewable power, while Northland is more of a pure play in this industry. Other companies include Emera, Brookfield and TransAlta Renewables and Boralex.

All of these companies are part of the Utility Equity sector. Historically utility stocks tend to perform better on a relative basis when economic growth is not strong and where interest rates are low. These companies tend to be more highly leveraged and benefit from lower rates, but conversely get hurt when rates rise. I just want to point out that renewables may have changed the industry dynamic somewhat from a historical slow growth one to a much faster secular growth story.

Total Returns (Price Appreciation plus Dividends) over the last twelve months as of the end of November showed significant outperformance of both Algonquin and Northland Power registering returns of 39.35% and 29.42% respectively. This compares favourably to the Canadian benchmark market index return of just over 17% for the same period. Fortis performed in line with the overall market with a 17.10% return.

These investments should be core long term holds with their secular growth trends and rising dividends.

Peter McMurtry, BCom, CFA
Financial Writer
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