On the surface, NextEra Energy (NEE -1.36%) is just a boring old utility. But once you start to drill down into the story a little bit, you see that there's a lot more going on here. That's both a good thing and a bad thing at the same time. Here's why, and what you need to know before you decide to invest in this U.S. utility giant.
1. Utility plus
The core of NextEra's business is Florida Power & Light. That regulated utility is the largest electricity provider in the state of Florida, and among the largest in the country. Moreover, the state's population is growing about 1.3% a year (roughly twice the national average). More customers means more revenue for a utility. This is the company's foundation.
Image source: Getty Images
However, the utility also operates NextEra Energy Resources, one of the largest renewable power companies in the world. It basically builds solar and wind assets and sells the power under long-term contracts to others. That's a fairly stable business, but it has material growth prospects now because of the global push toward low-carbon energy sources.
When you put the two pieces together, NextEra is anything but a typical utility.
2. Dividend growth machine
The difference between NextEra and its peers shows up best when you look at its dividend history. For starters, it has increased its dividend annually for 26 consecutive years. That's a record that few peers can match. Second, the annualized growth rate of the dividend over the past decade is a heady 10% or so, another number that few utilities can match. In fact, that's roughly three times the historical growth rate of inflation, meaning that the buying power of NextEra's dividend has grown considerably over time. That's impressive for any company, let alone a "boring" utility.
3. Rock solid finances
One of the reasons why NextEra has been able to increase its dividend like that is because it has a conservative balance sheet. For example, it's financial debt to equity ratio is around 0.4 times, below those of most of its closest industry rivals. That's pretty much where the company always resides.
SO Financial Debt to Equity (Quarterly) data by YCharts
Its payout ratio, meanwhile, is also toward the low end of its peer group. So there's plenty of room for NextEra to keep hiking the dividend. Its solid financial foundation also means it can keep its dividend streak going even if it faces some short-term headwinds.
4. Big plans for growth
As a utility, the core way for NextEra to grow is to spend money on its assets. The relationship is fairly simple on the renewable power side -- it builds new generation and then sells the power. That's a hot sector, so spending is likely to be strong here. There's a more complex path on the regulated side of the business, where NextEra gets a monopoly in the regions it serves but must get government approval for the rates it charges. This caps growth, but provides consistency to the business, since spending is largely decided outside of Wall Street's frequent ups and down.
NextEra plans to spend between $12 billion and $14 billion a year through 2022, split between its two main divisions. It has a core business (regulated utilities, a little less than half of that total) that should chug along with a faster growing business (renewable power) layered on top. The company is expecting that spending to back earnings growth of between 6% and 8% a year. Combined with a strong balance sheet and modest payout ratio, it is projecting annualized dividend growth of roughly 10% through 2022.
5. Always kind of expensive
So far NextEra sounds like a great utility to own... and it is. Which is why a lot of investors own it, pushing its shares up to the point where it offers a tiny 2.3% dividend yield. That's below the industry average and around half what similarly sized peers are paying today. In other words, investors are well aware of how impressive a company NextEra is, and they've bid the shares up accordingly. That's the norm here.
So if you are a value investor or someone looking to maximize the dividend income you collect, NextEra probably isn't the best stock for you. However, if you are keyed in on dividend growth, NextEra is likely to be one of the best ways to increase the diversification of your portfolio into a sector typically considered to be a relatively safe haven in times of market duress. NextEra's not a perfect investment, but for the right type of investor it's a pretty good option.
