3 Dividend-Paying Companies That Are Investing in the Energy Transition

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The rise of environmental, social, and governance (ESG) investing has sparked interest in the energy transition. The energy transition involves decarbonizing existing infrastructure, lowering emissions, and replacing fossil fuels with renewables.

The energy transition looks different depending on the industry. For companies outside the energy sector, it could simply mean rethinking existing processes and turning to greener alternatives. Air Products & Chemicals (APD 3.38%), Kinder Morgan (KMI 3.53%), and Freeport-McMoRan (FCX 7.99%) are three dividend stocks that are investing in the energy transition. Here’s what makes each a great buy now.

Image source: Getty Images.

Air Products is a noble approach for exposure to the growing hydrogen industry

Scott Levine (Air Products & Chemicals): The global transition to energy sources beyond fossil fuels encompasses a variety of power sources. While solar and wind power are the usual suspects in this discussion, hydrogen is becoming an increasingly popular consideration — a welcome sight for Air Products & Chemicals. A leader in the production of industrial gases, Air Products is making large investments in hydrogen assets to position itself for the growing demand of the alternative power source. This won’t occur overnight, but while it plays out, investors can benefit from a senior Dividend Aristocrat and its 2.6% forward-yielding dividend.

With regard to hydrogen, the future is now for Air Products in Texas. About one year ago, Air Products commenced operations at its liquid hydrogen production facility in LaPorte, Texas — a facility capable of producing 30 tons of liquid hydrogen daily. This facility, along with several others in operation, is already having a material effect on the company’s financials. Air Products recently reported its fiscal fourth-quarter 2022 earnings results, singling out its hydrogen business as a notable factor in the company’s sales volume growing 8% from 2021 to 2022.

Although it’s in the nascent stages of its development, the hydrogen economy is expected to flourish. And Air Products has projects in the pipeline to position itself to prosper from the industry’s growth. In Alberta, Canada, for example, Air Products is investing 1.6 billion Canadian dollars to develop a hydrogen facility that’s expected to start operations in 2024. In Louisiana, Air Products is making another large hydrogen investment: $4.5 billion to develop a blue hydrogen production facility. Expected to begin operations in 2026, the Louisiana facility will have a daily production capacity of more than 750 million standard cubic feet.

Kinder Morgan is returning to growth

Daniel Foelber (Kinder Morgan): Natural gas infrastructure giant Kinder Morgan is one of the largest pipeline operators in North America. With domestic natural gas demand facing slow growth in the years to come, the company is seeking opportunities to leverage a surplus of domestic natural gas supply. One way has been to invest in liquefied natural gas (LNG), which can be transported to energy buyers around the world. The company has also made investments to boost its pipeline takeaway capacity from shale plays, like those in the Permian Basin of West Texas, to the U.S. Gulf Coast. But it has also made strategic investments to boost its exposure to the energy transition.

Even with these investments, Kinder Morgan has kept a tight lid on capital expenditures. While the company is increasing spending off the 10-year lows, capital expenditures remain at healthy levels.

KMI Capital Expenditures (TTM) data by YCharts

Kinder Morgan’s cautious approach ensures it generates ample free cash flow to pay down debt and support its growing dividend. The dividend is a core part of the long-term investment thesis for Kinder Morgan. Its dividend yield is 6.1%, which is higher than the 4.1% risk-free three-month Treasury bill rate. 

Kinder Morgan’s October investor presentation, July 2022 ESG presentation, and comments made during its third-quarter earnings call all support the idea that the company is looking for low-carbon alternatives to natural gas.

“An analyst recently described Kinder Morgan as a capital-efficient business model leveraged to natural gas infrastructure growth,” said Kinder Morgan chair, Rich Kinder, on the company’s Q3 2022 earnings call. “I largely agree with that assessment, although it omits our significant steps in our energy transition efforts, including renewable natural gas, renewable diesel and potentially carbon capture and sequestration.”

Kinder Morgan’s investments in a low-carbon future should help the company remain relevant for decades to come. These alternatives must prove they can generate comparable cash flows to Kinder Morgan’s natural gas infrastructure.

Natural gas is integral to global power generation, industrial and commercial applications, and of course, residential use for cooling and heating. But if natural gas does lose its relevance over time, Kinder Morgan is well positioned to handle that transition.

Freeport-McMoRan is well placed to benefit from increased demand for copper

Lee Samaha (Freeport-McMoRan): It may seem odd to talk about a good old-fashioned industrial metal as a way to play the clean energy transition, but Freeport-McMoRan has a critical role to play in the switch to electric vehicles (EVs) and hybrid vehicles (HEVs) from traditional internal combustion engines (ICEs). EVs and HEVs typically require up to four times more copper (mainly wiring) than an ICE car.

However, it doesn’t stop there. EV charging networks need to be built, and further down the line, copper is needed in data wiring for vision systems and sensors used in autonomous driving technology.

In addition, copper is extensively used in renewable energy power generation, such as wind and solar energy. You’ll find the metal within the turbines and solar panels themselves, as well as in the batteries used to store energy from an intermittent source. It’s also used in electrical transmission and distribution networks to carry renewable energy to the grid. Meanwhile, the general trend of electrification in the economy — partly to increase efficiency and reduce carbon emissions — speaks to the increased demand for copper. 

It’s a case that Freeport-McMoRan’s CEO Richard Adkerson knows well and regularly highlights on earnings calls, often with frequent reference to the growing difficulty of the industry expanding supply to meet future demand. Freeport-McMoRan stands relatively better placed than most in that regard, with crucial expansion projects underway in the U.S. and Indonesia. 

Suppose Adkerson is right about the long-term demand/supply situation. In that case, the copper price will surely appreciate, and investors in the mining company can expect its current $0.60 per share dividend (yielding 1.9%) to grow significantly in the future.