NextEra Energy (NYSE: NEE) stands out as a formidable and efficiently managed utility, presenting an intriguing case from a historical valuation perspective. It’s the kind of company that would likely appeal to many investors seeking a solid addition to their portfolios. However, it might not be the ideal fit for everyone. Let’s delve into why NextEra Energy is a compelling buy and also explore reasons why some investors might choose to pass it by.
NextEra Energy is executing well
NextEra Energy demonstrated remarkable financial prowess by achieving a compound annual growth rate of 9.8% in adjusted earnings per share from 2012 to 2022. Even in 2023, the upward trajectory continued with a 9.3% rise in adjusted earnings per share. Surpassing a decade of nearly 10% growth in adjusted earnings is undeniably impressive, especially for a utility sector that is traditionally associated with slow and steady companies offering reliable income streams. NextEra Energy’s ability to outshine the typical utility narrative highlights its unique position in the market.
NextEra derives approximately 70% of its business from regulated utility assets, notably Florida Power & Light, providing a sturdy foundation. This segment essentially secures a regional monopoly, granted in exchange for government-approved rates and investment plans. Florida’s consistent net migration has contributed to a steady customer increase, further solidifying NextEra’s position.
On the growth front, the remaining 30% of the business is driven by the renewable power segment. Boasting around 34 gigawatts of production capacity, the company aims to potentially double this figure by 2026, positioning it as a key growth platform.
Anticipated outcomes include a 6% to 8% annual growth in adjusted earnings through at least 2026, emphasizing the synergies between the reliable regulated assets and the dynamic growth potential of renewable power.
NextEra’s financial foundation is robust, characterized by an investment-grade balance sheet. Notably, the company has consistently increased dividends annually for nearly three decades, underscoring its reliability. In essence, it’s the kind of unassuming yet dependable stock that resonates with a broad spectrum of investors.
NextEra will not be for everyone
The challenge arises as investors have widely acknowledged NextEra Energy’s commendable performance and optimistic outlook. Presently, the company’s dividend yield stands at 3.6%, a figure deemed average for a utility stock when using the Vanguard Utilities Index ETF (NYSEMKT: VPU) as a benchmark for the industry. Consequently, investors aiming to maximize income from their portfolios may not find NextEra Energy particularly enticing.
Nevertheless, it’s worth noting that the current 3.6% yield is among the highest observed over the past decade. In this context, the stock seems to be presenting a buying opportunity. This apparent “sale” could be attributed to the recent uptick in interest rates, which is expected to elevate the company’s expenses. The resultant increase in costs poses a potential headwind to growth, contributing to the stock’s current discounted valuation.
While the current dividend yield may not be stellar, NextEra Energy’s management anticipates a noteworthy 10% boost in dividends for 2024. This aligns closely with the rate achieved over the past decade, signaling a consistent commitment to dividend growth. The robust adjusted earnings projections mentioned earlier provide a solid foundation for sustained dividend increases, even if they may not reach double digits.
The key narrative here is the impressive dividend growth profile. While there are utilities with higher yields, locating one with a dividend growth track record as strong as NextEra Energy’s proves to be a more challenging task. Even if dividend growth moderates to match the pace of adjusted earnings expansion, NextEra Energy would still emerge as a standout dividend growth stock within the utility sector.
This narrative positions NextEra Energy as an attractive prospect for both growth-and-income investors and those specifically focused on dividend growth.
NextEra is not perfect, but it is very good
While perfection is elusive in the world of stocks, it’s understandable that not every investor will be drawn to NextEra Energy’s appeal. Nevertheless, with its robust business performance, a solid balance sheet, and promising growth prospects, a significant number of investors may find this utility to be compelling. Particularly, it could seamlessly integrate into a growth-and-income portfolio, offering diversification to an investment strategy that might otherwise have limited exposure to the utility sector.
