It shouldn't be a shock to anyone that not all utilities are created equal. Look at NextEra Energy (NEE -1.36%) and Black Hills (BKH -0.63%). Yes, they are both utilities, but they are doing vastly different things operationally, and their stocks offer different benefits to your portfolio. Here's a quick rundown on which one might be a better choice for you.
A dividend divide
Since the utility sector is often viewed as a place to get reliable income, it makes sense to start with a comparison of yields. Black Hill's dividend yield is roughly 4.4% today. NextEra's yield is around 2.7%. If you are trying to maximize the income your portfolio generates, Black Hills will likely be the more attractive stock.
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Black Hills also has the more impressive dividend history, at least when it comes to annual dividend increases. The utility is a highly elite Dividend King, with over five decades of yearly hikes under its belt. NextEra is no slouch, but the 29 consecutive years of annual increases it has posted just don't have the same cachet.
Dividend growth could win you over
Don't count NextEra Energy out of the dividend race just yet, however. Over the past decade, Black Hills' dividend has increased at an annualized rate of roughly 5%. That's pretty solid for a utility. But NextEra has increased its dividend at a compound annual rate of nearly 11%. That's pretty incredible for a utility. So if you are a dividend-growth-focused investor, NextEra will likely be a more attractive choice for you.
Does size matter?
While Black Hills' long history of dividend increases should probably put most concerns to rest about its stability and longevity, investors need to recognize that it is a relatively small utility. It has a market capitalization of just $3.8 billion. That compares to a market cap of nearly $139 billion for NextEra. Simply put, Black Hills' entire business would be a rounding error at NextEra Energy. NextEra has greater economies of scale and greater access to capital markets given its larger size. Both likely give it a leg up on its smaller peer.
However, being smaller should make it easier for Black Hills to grow its business, since smaller investments will have a larger impact on the company's top and bottom lines. But for conservative investors that prefer to stick to industry giants, NextEra is the hands-down winner on scale.
Very different business models
One of the reasons why NextEra has been able to grow its dividend and business so quickly is because it is really two businesses in one. It has a regulated utility operation with material exposure to Florida, which is benefiting from in-migration. And, on top of that, it has a rapidly expanding renewable power business, which has latched on to the global push to reduce carbon emissions.
Black Hills is far more boring, operating a natural gas utility and an electric utility serving customers in Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. While it has seen attractive customer growth rates in its markets, it just doesn't have the same clean energy cachet, or growth opportunity, as NextEra.
Getting a bargain price
One of the more interesting things about these two stocks is that they both appear historically cheap today. As the chart below shows, each stock has been heading lower of late (at least partly because rising interest rates have made alternative income investments, like CDs, more attractive). That has led to declining price-to-earnings ratios, with each company's P/E now below their respective five-year average for that valuation metric. While Black Hills looks cheaper, that makes sense given NextEra's higher dividend growth rate.
In other words, investors looking at Black Hills and NextEra should probably pay more attention to how each one would match up with their broader investment goals rather than try to figure out which one is the better bargain.
Which one is right for you?
At this point, most investors will probably have made a choice between Black Hills and NextEra. And it most likely boils down to dividend growth versus current income. They are both fine utilities, they just provide different benefits to investors. If you want to maximize income, do a deep dive into Black Hills. If you want to maximize dividend growth, you'll be better off researching NextEra.
