A lot can change for a utility in two decades, especially when it invests tens of billions of dollars in renewable energy.
In June 2001, NextEra Energy (NYSE:NEE) boasted a market cap of $10 billion, which ranked 30th among all utilities on the planet. Today, the company's market valuation sits at just over $77 billion. Only one other global peer has a market cap above $60 billion.
While NextEra Energy is the world's largest utility by market cap today, investors shouldn't necessarily take that as a sign that its growth days are over. The company's near- and long-term strategies aim to leverage its massive size and capital base to its advantage. Management thinks it can grow the distribution per share by 13% per year through at least 2020. An industry-leading renewable energy backlog -- which is expected to swell 43% by 2020 -- will prove integral to achieving success.
The growth strategy through 2020
NextEra Energy makes its money through ownership of two subsidiaries: Florida Power & Light and NextEra Energy Resources. The former is one of the largest electric utilities in the United States and contributed 35% of the business's net income in 2017. The latter is one of the largest power generators in the country -- and the largest owner of wind power -- and was responsible for 55% of total net income last year (the remaining net income came from corporate activities).
Both have ambitious growth strategies. For instance, Florida Power & Light is investing heavily in solar farms. It recently commissioned 600 megawatts (MW) of new solar, owns the largest solar-plus-storage operation in the United States, and plans on installing an additional 3,200 MW of solar in the next few years. It also serves about 5 million customers (or an estimated 10 million people) in the state, but NextEra Energy is about to expand its operational footprint in Florida by 12%.
The company recently acquired Gulf Power and Florida City Gas from Southern Company for approximately $6.5 billion. While the deal wasn't cheap, it will add approximately 600,000 customers in the state and is expected to add $0.15 to $0.20 in earnings per share (EPS) by 2020. That alone would account for up to 16% of the planned dividend increase.
Of course, NextEra Energy Resources will provide the majority of the incremental earnings and cash flow needed to boost the parent's dividend. The power-generation leader leans on wind and solar for 80% of its installed power mix, and nuclear for another 14%, which gives it one of the cleanest generation profiles in the industry. In fact, much of NextEra Energy's growth over the past two decades has come from the massive investments in wind power assets, which totaled 14,000 MW at the end of 2017 and could top 18,000 MW by the end of this year.
The company is looking to continue its dominance in wind energy, while replicating that success with solar energy and energy storage. NextEra Energy Resources currently boasts a nationwide development pipeline including 28,000 MW of renewable energy. By 2020, it expects to grow the backlog to an astounding 40,000 MW of wind and solar.
The generation projects entering service this year and next give management confidence to forecast that NextEra Energy can grow EPS at 6% to 8% annually from 2018 to 2021. Meanwhile, the dividend is expected to grow 12% to 14% each year through 2020. While that outpaces the rate of earnings growth, the renewable energy leader has a comfortable amount of breathing room to expand its distribution: Last year, it boasted a payout ratio of 59%, compared to an average of 65% for its peers.
This renewable energy stock is one for the long haul
NextEra Energy became a $77 billion Goliath thanks to a massive bet on renewable energy, but there's plenty of long-term growth. The company thinks that wind will be the cheapest source of electricity in the United States after 2020, while solar will reach cost parity with natural gas. That could serve as the tipping point for switching the country from coal and nuclear to wind, solar, and natural gas at an even faster pace than is underway right now.
It might not be possible to find a company better positioned to capitalize on that trend. Between 2017 and 2020, NextEra Energy plans to invest $19.8 billion in Florida Power & Light and $23.5 billion in its power-generation portfolio. In other words, the investments made today hold tremendous promise for enabling the next phase of growth. Combine that with a history of creating shareholder value over long periods of time, and this renewable energy stock is a buy for long-term investors.