Key Points
Unbeknown to some rookie investors, high oil prices can stoke enthusiasm for clean energy stocks. It happened in 2022. Soon after Russia invaded Ukraine, oil prices spiked, sending the S&P Global Clean Energy Transition Index into rally mode.
Though not in jaw-dropping fashion, that scenario is playing out again this year, with that index up nearly 9% year to date as of Aug. 19. Renewable energy stocks rising in tandem with rising fossil fuel prices makes sense.Elevated crude prices can be demand-destructive, and when that situation arises due to geopolitical events, governments around the world increasingly view energy security as national security, prompting deeper consideration of renewables.
However, oil’s positive reverberations on clean energy equities don’t play out uniformly. Just look at Brookfield Renewable (NYSE: BEPC), whose shares are off 21.2% over the past six months. That decline, which represents a bear market, may sound like a buying opportunity, but this energy stock isn’t in a better place than it was six months ago. Here’s why.
Fed a foe to Brookfield Renewable
Undoubtedly, some investors may be enticed by Brookfield Renewable’s 4.7% yield, which makes it one of the stalwarts of the renewable energy dividend stock sphere. Now isn’t the time to give in to dividend temptation with this stock.
The reason is that — and this explains why the stock isn’t in a better position today than it was six months ago — Brookfield often heads to the capital markets to sell equity or debt. In terms of raising cash via the bond market, now isn’t the time for that strategy because interest rates are high, meaning corporate borrowers will be subject to higher interest payments when they issue debt.
Compounding that issue is the fact that several members of the Federal Reserve want the central bank to raise rates to fight off inflation. There’s another rate-related matter to consider with Brookfield. The company is an active seller of mature assets, using the proceeds raised to reinvest in its business and pursue new deals.
While Brookfield is on a brisk pace of “capital recycling” in 2026, its ability to efficiently offload assets could be crimped if prospective buyers can’t pay in cash and are forced to raise capital at higher interest rates. So, like traditional clean energy stocks, Brookfield is vulnerable to higher interest rates, and a higher-for-longer interest rate environment makes it difficult to embrace this stock.
Wait, but don’t ignore
Brookfield is an interesting case because the stock’s slump and interest rate woes confirm that the shares are significantly weaker and riskier than they were in March. Those are reasons to pass on the stock for now, but “pass” and “ignore” are different strategies.
Risk-tolerant long-term investors may want to monitor this stock because, despite the aforementioned challenges, interest rates will eventually come down, and the company has attractive fundamentals. Brookfield reported record funds from operations (FFO) in the second quarter, and, as noted above, its asset recycling program has been strong.
If Brookfield can articulate artificial intelligence (AI) power demand benefits and leverage reduction progress to investors, the stock could offer some upside down the road. Just wait for the rate dust to settle before jumping in.
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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Renewable. The Motley Fool has a disclosure policy.