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Why Retirees Should Keep an Eye on This Utility Stock This Week

By Matthew DiLallo - Oct 20, 2019 at 4:00PM

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NextEra Energy has a big report coming out on Tuesday morning.

NextEra Energy (NEE -0.17%) is far from a sleepy utility stock. The clean-energy-focused company has consistently generated market-crushing returns. Add in its above-average dividend, and it has been a dream stock for retirees over the years.

The utility fully expects to continue generating high-powered returns in the coming years by pouring even more money into renewable energy. Investors will get another glimpse of the company's progress with executing its strategy this week when it unveils its third-quarter results. Here are a couple of items that retirement-focused investors should keep an eye on in that report.

Two people in hard hats and a laptop looking at a row of wind turbines.

Image source: Getty Images.

How was the wind?

NextEra Energy produces more power from the wind and sun than any other company in the world. The wind, however, is the biggest contributor to its energy resources segment at 64% of its total power-producing capacity. While the company's focus on wind has helped power its growth over the years, it has proved problematic this year because of a drought in wind resources. That's one reason America's renewable energy production declined by 1.1% during the first half of this year. This slide came even though the country's wind capacity has increased by 8% in the past year.

The decline in wind resources affected NextEra's bottom line. During the second quarter, its energy resources segment reported a $0.06-per-share earnings headwind because wind strength in its operating areas was only 93% of its historical average. That marked the fourth straight quarter in which the wind resource was below average.

Given this trend, investors should see if the wind picked back up during the third quarter. If it didn't, then that could cause problems down the road. The company, for example, might not grow earnings as fast as it anticipated. That could cause it to increase its dividend at a slower-than-expected pace in the coming years. Meanwhile, it could cause the company to move forward with fewer new wind projects since a consistently lower wind resource would eat into its returns.

How's the integration of Gulf Power coming along?

In January, the company completed the final phase of its $6.5 billion acquisition of Gulf Power, and some related assets, from fellow utility Southern Company. NextEra expected to spend most of this year integrating those assets. That would set it up to generate an additional $0.15 per share of earnings in 2020 and another incremental $0.20 per share in 2021.

The company wrote in its second-quarter earnings release that "the Gulf Power integration continues to progress well." It further noted that "Gulf Power has already begun to see significant benefits from a focus on operational cost effectiveness." One of its aims is to improve this metric from $29 per retail megawatt-hour (MWh) last year to $14-$15 per retail MWh by 2021. Its success in reducing costs while also investing in expansion projects will help grow Gulf Power's income by a 16% compound annual rate through 2021. That would enable it to achieve its earnings targets in the next two years. Given Gulf Power's importance to NextEra's growth in the coming years, investors should keep a close eye on its progress integrating that business.

Hoping for continued success

Despite the weaker wind resources earlier this year, NextEra noted in its second-quarter report that it expected its 2019 earnings to come in at or near the top end of its $8.00- to $8.50-per-share outlook. Ideally, the company's third-quarter results will reaffirm that view as well as keep it on pace to deliver on its longer-term forecast that earnings will rise to between $10.00-$10.75 per share by 2021. Hitting that forecast increases the likelihood that it can deliver on its plan to increase its dividend by 12% to 14% per year at least through 2020. Achieving that high-powered growth forecast would probably enable NextEra to continue generating market-beating total returns for retirement-focused investors in the coming years.

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