Are industry-leading wind turbine makers worthy of investment?
To meet growing electricity demand and tackle climate change, renewable energy development is booming globally. Solar PV and wind were the top 2 contributors to global renewable energy growth in 2020 and wind energy is expected to dominate the growth in the U.S. through 2024. (For more information about wind energy’s future, readers can check out this blog). Considering the expanding wind market, are key players in commercial wind development such as wind turbine manufacturers good investment choices for U.S. investors?
The market share of primary wind turbine manufacturers varies with geography and sectors. Combining onshore and offshore wind projects, Denmark-based company Vestas supplied most wind turbines around the world in 2020, followed by U.S.-based General Electric (GE) and China-based Gold Wind, according to GWEC. Envision and Siemens Gamesa ranked fourth and fifth, respectively. Although Siemens Gamesa’s market share shrank from 2019, it is the top supplier in the offshore wind sector. In the U.S., GE dominates its home market by its installation of more than 50% of turbines, followed by Siemens Gamesa and Vestas.
Despite their importance, the stocks of the top three wind turbine makers in the U.S. may not be a great investment target for investors, or at least for now. Here are some reasons. Although GE’s dominance will likely continue particularly in the U.S., GE’s stock is influenced by its other business segments including health care, aviation, power and capital. As of Q4 in 2020, GE’s renewables sector only comprised 20% of total revenue and made no profit. Therefore, it is unwise to purchase GE’s stocks simply based on its market share and performance in the wind industry.
A U.S. investor could invest on Vestas and Siemens Gamesa via purchases of these foreign stocks, American depositary receipts, or ETFs that included them in portfolios such as iShares Global Clean Energy ETF. But additional foreign taxes, higher commissions and higher risk exposure to fluctuating currency rates can significantly reduce investment returns.
If we did not consider additional fees on top of foreign stock prices, do these companies yield good returns? Take Vestas as an example. As one of leading wind turbine makers, Vestas’ total revenue came from selling wind turbines (~79%), providing service after installation (~12.5%), and developing offshore wind projects (~8.5%), according to its 2020 financial statement. Over the past ten years, it had an average of 6% growth rate in net income. It paid out dividends that accounted for 30% of its net profit in 2019 and will likely continue the dividend payment for shareholders. However, despite its growth and dividend payment, its estimated annual return is about 5.8% with the market price as of writing, which is lower than the average stock market return (~10%). Its annual return would be even lower for U.S. investors with extra costs of foreign stocks.
In conclusion, industry-leading wind turbine manufacturers play important roles in pushing the world towards more sustainability and their businesses will likely expand in a growing market. However, from the perspective of investment, they are not the must-invested companies in my current portfolio. There are better investment options in wind and other renewable industries.
Disclaimer: This is not financial investment advice. It is for information use only. Please consult professional consultants before making any major investment decisions.