When you think of sustainable energy investments, companies that generate power with renewable energy sources like wind, solar and bioenergy probably come to mind. Not an electric utility like NRG Energy, which ranks very highly on IBD's 100 Most Sustainable Companies for 2024.
At first glance, the Texas-based power provider might not jump out as a poster child for sustainability. NRG Energy sold off its renewables business back in 2018. And it generates power for its retail and business customers with fossil fuels like coal and natural gas.
Yet NRG is focused on the future of energy. It's balancing the transition to renewable for the long term. The company provides its nearly 8 million residential customers with tech-driven smart-home solutions via recently acquired home security firm Vivint.
"Appearances can be misleading," said Jonathan Pragel, executive director at Calvert Research & Management who analyzes stocks in the power, utilities and clean-energy sectors.
NRG Energy does "not fit the mold" of a typical green or sustainable investment, Pragel admits. Yet, NRG's strategy shift in recent years to reduce its carbon footprint, coupled with its emphasis on returning capital to shareholders via dividends and stock buybacks, earns the company high marks for sustainability.
NRG Energy: Stewardship Among 'Fossil Heavy' Companies
The productive use of capital from both an economic and sustainability perspective is a powerful combination, especially for a company in a sector known for its carbon emissions.
"We see NRG as a case study on what effective stewardship looks like for fossil-heavy companies," said Pragel, citing a big reason Calvert owns shares. "We believe the path taken by NRG can broaden investor perspectives on what it can look like to be a winner in the energy transition."
NRG Energy's high rank on IBD's Most Sustainable Companies list is based in part on its strong climate management score from Morningstar Sustainalytics. This measures a company's systems for managing its exposure to the low-carbon transition and other ESG issues. Read all the stories in our special report, including the full list and more company profiles.
The stock sports an IBD Relative Strength Rating of 95, which is the highest among the 10 best sustainable companies in this year's rankings.
Growing a renewables business isn't the only way to take part in the energy transition away from fossil fuels. In fact, being in a business that involves the use of power plants also creates an opportunity for companies like NRG Energy to "contribute to the nation's overall carbon emissions reduction goal," said Daniel Rich, an analyst at Wall Street research firm CFRA.
Read More About The Other Top Winners On Our Most Sustainable Companies List: Moody's And T-Mobile US
Championing An Energy Transition For The Future
In NRG's 2023 Sustainability Report, Larry Coben, who officially took over as CEO in August, said the company places "sustainability at the core of everything we do." And he stressed that the company isn't just adapting to change. "We are leading it," he said. "(We are) championing an intentional energy transition that is safe, affordable, reliable and beneficial for future generations."
The company says its emphasis on sustainability not only reduces its environmental footprint but is also tied directly to business success, reduced risk and an enhanced reputation. In the 10 years ending in 2023, NRG Energy reduced its greenhouse gas emissions by 58%. It also is working toward net-zero carbon emissions by 2050.
"They've made good progress," said Rich.
A 'Shrink To Grow' Strategy At NRG Energy
Shrinking its carbon footprint and responsibly retiring fossil fuel assets are part of the strategy. The company is cutting back on the use of coal as its primary fuel source. It's shifting to natural gas, which emits far less carbon dioxide. In fact, it has been retiring coal-burning plants in recent years. In the 10 years ending in 2023, NRG Energy has retired or divested 73% of its fossil fuel generation capacity, according to the company.
Currently, NRG's portfolio consists of 51% coal, 44% natural gas, 2% renewables, and about 3% oil.
Ironically, in a world where fossil fuel assets face an uncertain future, the strategy of "shrink to grow" for emitters is an investor-friendly concept, according to Pragel. Having less riding on power generation plants reduces the risk of so-called stranded assets, or investments that can lose value or become obsolete, worthless or unsaleable.
What's more, returning capital to shareholders can drive significant value creation. NRG Energy noted at its 2023 investor day that it expects to direct 80% of its free cash flow to dividends, buybacks and debt reduction and just 20% to growth initiatives. The previous split was 50% return to shareholders and 50% to drive growth, according to CFRA.
Out With The Old, In With The New Energies
"NRG's capital reduction philosophy has paid dividends," said Pragel. "By retiring older, inefficient generation, the company has been able to improve its environmental profile as well as its financial profile."
The company returned $1.5 billion to shareholders in 2023, or 17% of the stock's average market cap. It also increased its dividend by 8% last year, the fifth straight year it boosted its dividend. It also paid down $1.52 billion in debt. Through July of this year, the company has bought back $176 million in stock with a full-year target of $825 million.
Acquiring a non-utility, low-carbon-intensive nationwide business like Vivint can also add to NRG Energy's green tint, adds CFRA's Rich. Vivint helps boost a home's energy efficiency and provides existing electric customers with additional services, including smart thermostats and smart lights.
"If you are enabling customers to make smarter energy choices by using an app on their phone to track usage and not waste energy, that's obviously a good thing for sustainability and (to reduce) emissions," said Rich.
Part of NRG's sustainability strategy is to empower customers to achieve their own sustainability goals. The company offers customers options for solar- or wind-powered electric plans. It also can equip them with smart home apps that help them better manage their energy usage. Smart home solutions include offering customers credits if they select rooftop solar-powered electricity plans. Also, there are discounted rates for overnight EV charging. The company also helps commercial customers gain insights into their carbon usage.
NRG Energy Among Top-Performing Utility Stocks
Still, the Vivint acquisition, which the company says is part of its consumer-focused growth strategy, has not been void of controversy. Activist investor Elliott Investment Management, which has a position in the stock, has been critical of the move. It would rather the company unlock value by refocusing on its core business of supplying power. CEO Mauricio Gutierrez departed last year. Coben was named CEO, and four new board members, backed by Elliott, were appointed.
Wall Street likes what it sees through its green-tinted glasses. NRG Energy is among the top-performing utility stocks year-to-date. As of Oct. 4, shares were up 84% in 2024.
"A company with energy in their name can still perform well," said Rich. "All NRG Energy and other utilities can do is try to best meet their carbon emission goals and make their power generation portfolios cleaner."
NRG Energy is a member of many sustainability indexes. These include the Morningstar Low Carbon Transition Leaders Indexes, which are the foundation of IBD's Most Sustainable Companies list.
For The Full List And Details On The Methodology, See IBD's 100 Most Sustainable Companies For 2024
Sustainability Requires Constant Dedication
NRG Energy plans to shrink its carbon footprint further. The company is set to end its lease on its Cottonwood natural gas plant in Texas next year. It also plans to retire its coal-fired Powerton plant in Illinois by the end of 2028. Those moves could reduce NRG Energy's emissions by an additional 15% to 20% by 2030, according to Calvert Research & Management.
"Sustainability is not a destination, but rather a journey that requires constant adaptation, learning, and dedication," NRG Energy's chief sustainability officer Lynda Clemmons wrote in the 2023 Sustainability Report.
NRG Energy is also committed to the electrification of transportation. It provides EV charging technology to its customers, and it added 14 all-electric trucks to its fleet in 2023. It's also big on reuse and recycling. Last year, it reused 68% of coal combustible residuals (CCRs) to produce construction materials like concrete and cement.
Sustainability Is A Direction
Giving back to the community is another part of NRG's sustainability DNA. In 2023, the company donated $7 million to charity and its employees volunteered 31,100 hours of their time. The company's board of directors is also both gender and ethnically diverse to reflect the people and communities it serves. Currently, the board includes five women and two members who identify as ethnically diverse.
NRG Energy, despite using fossil fuels to generate power, deserves credit for moving in the right direction, says Travis Miller, an analyst at Morningstar.
"Everyone thinks that sustainability (means a company) has to be carbon zero. But it is more about the direction, improvement and quest to reduce the carbon footprint," Miller said.
