The Ivy for Wednesday, August 31 2022
Ridiculous Growth Potential for This Dividend Aristocrat
A conservative utility stock that is fast-growing sounds like an anomaly. A clean energy stock with a reliable dividend seems like a unicorn. But NextEra Energy (NEE) ticks all those boxes. NextEra is a unique electric power and energy infrastructure company that continues to report impressive financial strength.
Although the company could face some near-term uncertainties, it is still on track to achieve its 2022 outlook. NextEra's growing backlog of renewal energy projects and its increasing dividend present an opportunity that's tough to pass up on as a long-term investor. Is now the time to buy in?
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NextEra Is a World Leader In Solar & Wind Energy
NextEra Energy is the largest U.S.-regulated electric services company by market capitalization.
It is also the world's largest producer of solar and wind energy and one of America's largest capital investors in infrastructure, with between $50 and $55 billion in new infrastructure investments planned through 2022.
The company boasts:
- Top 20 in the world for innovation, according to Fortune
- Reduced dependence on foreign oil by 98% since 2001
- A net generating capacity of 45,500 megawatts
- Yielded a 945% shareholder return over the last 15 years
- Created thousands of high-paying American jobs through its investments
What's Next for NextEra Energy?
There are two sides to NextEra's business model — its slow and steady, regulated utility business, which is largely focused on Florida, and its non-regulated renewable power operations.
These two segments have contributed to NextEra Energy growing its adjusted earnings per share (EPS) at an 8.4% compound annual rate since 2006, and the latter is expected to be a significant growth driver.
Both businesses are forecast to grow further, not least because of steady migration of people and businesses to Florida.
Between 2022 and 2025, the renewable energy development segment is anticipated to build around 28 to 37 GW of renewables and storage projects — 30% more than the company's renewables operating portfolio today.
NextEra Energy expects to invest $85 billion to $95 billion into new investments to expand its operations through 2025 and to grow its adjusted earnings per share from $2.55 last year to between $3.45 to $3.70 per share by 2025.
Is NextEra's Profitability Reason for concern?
A closer look at NextEra's profitability metrics reveals some red flags. Four years ago, NextEra had the highest return on equity (ROE) among its peers. Today, the company is the second-lowest out of the top ten regulated electric U.S. utilities. The same is true for its return on assets (ROA).
So, why is NextEra performing well compared to the S&P 500?
NextEra grew its adjusted EPS at a compound annual growth rate (CAGR) of 8.4% between 2006 and 2021. The company's cash flow on total assets remains strong too.
It should be noted that the company's strategic spending on its energy development pipeline has come at the expense of its profitability. As NextEra builds out its renewable energy portfolio, the company's investment in multi-decade assets makes weakening profitability metrics understandable. NextEra is one of the biggest names in the renewable energy space, and there's plenty of growth ahead.
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Years of Dividend Growth
NextEra Energy investors have enjoyed a long history of dividend growth. The company has increased its dividend for 28 years straight, making it a Dividend Aristocrat. Although this is not uncommon among utilities, NextEra's history showcases its support for income investors.
As recently stated by NextEra's CFO, "We also continue to expect to grow our dividends per share at a roughly 10% rate per year through at least 2024 off a 2022 base."
This anticipated growth makes NextEra an attractive option for investors interested in the future of energy and those seeking a steady stream of passive income.
Buy and Hold Shares of NEE
For decades, NextEra Energy has remained a solid business and profitable investment. The bull case is that NextEra offers two unique revenue paths. The stock is a utility-like investment and a fast-growing renewable energy investment. It is strong financially and will continue to benefit from secular trends. Plus, it offers an attractive, reliable dividend.
The bears are focused on rising interest rates, which won't help NextEra's high capital appetite. The company's debt has increased 190% since 2010, and so rising rates will impact future returns.
Both arguments have legitimacy. However, NextEra is positioned to profit in the future, and regardless of the economy, people need power. If you're keen on NextEra Energy, your best chance of making money is to buy and hold long-term — preferably for decades.
- G. O'Fiachra
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