I believe that the move to green energy is unavoidable and that this opens up investment opportunities that will help to create positive change as well as profit. Warren Buffett’s own Berkshire Hathaway (NYSE: BRK.B) shares seem like a great way for me to participate in the green revolution.
Berkshire Hathaway is a conglomerate that generates money from a variety of sources. Berkshire Hathaway Energy (BHE), the company’s electric utility arm, is one of them. At first glance, it’s easy to dismiss Berkshire Hathaway as a renewable energy investment option. BHE only accounts for around 9% of Berkshire Hathaway’s income, while renewable energy accounts for a little under half of the company’s overall energy output. However, I believe that BHE’s location inside Berkshire Hathaway provides it with a significant competitive edge over other electric utilities. I also believe it reduces some of the big risks that come with investing in the renewable energy transition
A significant advantage
Warren Buffett identified a fundamental advantage that BHE has over other power companies in his 2020 letter to shareholders. The majority of electric utility businesses pay out around 60% of their profits as dividends to income-seeking shareholders. This makes it much harder for them to invest in renewable energy infrastructure. Instead, they must finance their investments through debt or the issuance of stock, diluting the value of current owners’ shares.
BHE, on the other hand, does not pay a dividend. This may make it less appealing to those of us who appreciate passive income. But it means it may use the money it makes to invest in renewable energy projects without taking on debt or issuing stock to do so.
BHE has already been able to make significant renewable energy investments. It has spent more than $35bn on a variety of renewable energy initiatives while cutting back on fossil fuels. Coal-fired energy generation accounted for 74% of BHE’s total energy generation in 2006. By the end of 2020, the percentage had dropped to 33%. BHE was also able to spend $18bn on the transmission infrastructure needed for the renewable energy transition. All because of its access to capital.
Green energy investing risks
Over-optimism is the biggest danger I see with investing in green energy firms. While I believe that the transition to renewable energy is unavoidable, businesses must remain disciplined in their investments in this area. Making investments that don’t pay off can be costly, and it might even lead to bankruptcy. In 2016, SunEdison provided an excellent illustration of this.
However, I believe that BHE’s position inside Berkshire Hathaway mitigates this risk. This is due to two factors. The first is the capacity to invest in renewable energy with its funds rather than borrowing. The second is BHE’s position inside the larger conglomerate, which gives it access to $150bn in capital. Warren Buffett oversees the company’s investments as part of Berkshire Hathaway. When it comes to discovering good value assets, I can’t think of anybody better.
As a result, I believe that owning Berkshire Hathaway stock is a great way to participate in the renewable energy revolution.
James Reynolds owns Berkshire Hathaway (B shares). 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.
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