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Down 15%, NextEra Energy Is Still a Dividend Growth Machine

By Reuben Gregg Brewer - Updated Apr 16, 2020 at 5:13PM

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NextEra has bounced back from its lows, but it should still interest investors focused on dividend growth.

As the impact of COVID-19 started to become more clear on a global scale, investors quickly pushed U.S. stocks into a bear market. The selling was across the board, forcing even great companies with solid prospects sharply lower. The market has since pared those losses, technically entering a bull market. However, utility giant NextEra Energy (NEE 0.97%) is still around 15% below its early-year highs. It remains worthy of a close look for dividend growth investors.

An impressive history

When it comes to large investor-owned electric utilities, the normal expectation is a slow and steady tortoise with a sizable dividend yield. NextEra breaks that mold, offering just a 2.2% yield. That's well below the industry average of roughly 3.2%, using Vanguard Utilities Index ETF as a proxy for the sector. Other industry giants, like Duke Energy (DUK 0.23%) and The Southern Company (SO 0.05%), offer yields of 4% or more. 

A worker standing in front of electrical power equipment

Image source: Getty Images.

But NextEra excels when it comes to dividend growth. It has 25 years of consecutive dividend increases under its belt. More impressive: Its average annualized dividend increase over the past decade was roughly 10%. The increases have been even higher over shorter periods, with the one-, three-, and five-year spans all around the 12% mark. Duke and Southern have solid histories of annual dividend increases, too, but their average hikes are in the low single digits.    

There's a very good reason why investors are willing to pay a premium for NextEra Energy. It isn't cheap now, and hardly ever is, but if you're focused on dividend growth, it is among the best utility options you can find.

No slowing down

The best part is that even a recession driven by COVID-19 isn't likely to derail NextEra's business or its growth plans. There are a number of reasons for this.

As a utility, NextEra provides something society needs. If you have ever experienced a storm-related power outage, you know how quickly normal daily life stops without power. The modern economy simply doesn't work without electricity. While a recession will likely lead to lower sales and earnings as businesses and consumers pull back, over the long term, the core of NextEra's business should remain strong.

NextEra has two main, and complementary, divisions: It operates regulated utilities in Florida and provides renewable power, through long-term contracts, to others. The regulated business benefits from a near-monopoly in a state with a growing population. Yes, the company has to get its rates approved by the government, but that's actually a benefit in some ways. Notably, rate hikes are made based on long-term demand expectations and reliability needs (among other things), so near-term market fluctuations aren't that big a consideration. That's true on the renewable power side, too, since much of that business is related to other utilities that have their own long-term spending plans to live up to. Thus, NextEra's plans for $50 billion to $55 billion in capital spending between 2019 and 2022 are pretty well locked in despite COVID-19.   

NEE Dividend Per Share (Annual) Chart

NEE Dividend Per Share (Annual) data by YCharts.

NextEra has one of the strongest balance sheets in the utility sector. Its debt-to-equity ratio is around 0.35. Southern's ratio is about 0.65, and Duke's comes in at roughly 0.85. Utilities are large and costly businesses to run, so significant leverage isn't unusual. However, NextEra's debt-to-equity ratio would be modest for just about any company in any industry, and is clearly at the low end in the utility space. That gives it a lot of balance sheet flexibility to deal with adversity and to fund growth spending.     

The payout ratio also provides material comfort that NextEra's dividend growth is on solid ground. Looking back over the trailing 12 months, its payout ratio was in the low 60% range. Duke's ratio was in the low 70%s, which is more typical for a large utility. That said, NextEra has long been at the low end of the broader utility group on this metric. Thanks to a strong balance sheet and sizable capital spending plans, the end result is likely to be a continuation of the long-term trends. In fact, NextEra is projecting dividend growth to be as high as 12% a year through 2022, with a drop to 10% thereafter. Those are industry-leading dividend growth rates in the utility space and, in fact, would be really good for just about any company in any sector.   

Never cheap, but for a good reason

NextEra is pretty much always an expensive stock. But its history and growth expectations (for the dividend and the business) back a premium price. And that's just the internal projections; it has been increasingly looking at acquisitions, which could result in even stronger growth. Investors with a value bent won't be interested in it. Those looking to maximize current income will be similarly disappointed with NextEra. But if you are a dividend growth investor, the recent pullback has reduced the price of a utility with impressive dividend credentials and a very strong likelihood of continued above-average dividend growth. 

Reuben Gregg Brewer owns shares of Southern Company. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
$89.78 (0.97%) $0.86
The Southern Company Stock Quote
The Southern Company
$78.29 (0.05%) $0.04
Duke Energy Corporation Stock Quote
Duke Energy Corporation
$110.06 (0.23%) $0.25

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