NextEra Energy (NEE 1.74%) made headlines last week by reportedly approaching rival utility Duke Energy (DUK 0.89%) with a takeover offer. While Duke rejected the initial deal, it left the door open for a potential union. 

On one hand, a strategic combination between Duke and NextEra Energy would make lots of strategic sense. It would create a mega-utility with the scale to accelerate the country's transition to renewable energy. However, while the deal would amp up the combined company's growth prospects, NextEra doesn't need Duke to generate strong returns for its investors. So they shouldn't fret if the company walks away from these talks.

Two worker watching the power tower and substation with sunset background.

Image source: Getty Images.

The merger makes sense on many levels

NextEra is already one of the largest and most valuable energy companies in the country as it recently passed oil giant ExxonMobil in market capitalization. A combination with Duke Energy, which has a more than $60 billion market cap, would push NextEra's market value to around $200 billion. That increased scale would enable the combined company to reduce costs and capture even more expansion opportunities in the future.

The proposed combination would join Florida's biggest electric utility in NextEra (which owns Florida Power & Light and Gulf Power) with Duke's diversified operations that include utilities in Florida, North Carolina, South Carolina, Indiana, Ohio, and Kentucky. Thus, the deal would enhance NextEra's leading position in Florida while expanding its reach to five more states. Duke's presence in South Carolina is noteworthy since NextEra is working with its government to take over beleaguered public utility Santee Cooper.  

If it brought Duke into the fold, NextEra could implement its successful integration program, which has enabled it to create significant value from prior acquisitions. For example, the company expects its 2019 Gulf Power deal to add $0.15 per share to its bottom line this year and another $0.20 per share in 2021. Given Duke's size and the potential synergies, that deal could be even more accretive to earnings as long as it doesn't overpay. One of the drivers would be its ability to accelerate Duke's transition to cheaper renewable energy by replacing its legacy coal plants with new wind and solar facilities.

Wind turbines in a field at sunset.

Image source: Getty Images.

The go-it-alone strategy is more than fine

While a deal with Duke could supercharge NextEra Energy's earnings growth, it doesn't need this combination to succeed. That's clear by the company's recently updated growth forecast, where it boosted and extended its outlook. Thanks to its strong execution and renewable energy development program, NextEra increased its 2021 earnings outlook by $0.20 per share (before factoring in its upcoming stock split). That's on top of the 6% to 8% growth it already anticipated and the $0.20 per share of earnings accretion from the Gulf Power deal. Overall, it sees next year's earnings coming in more than 10% above this year's results, which are on track to grow 7% from last year at the midpoint.

Meanwhile, the company expects to grow its earnings at 6% to 8% per year through at least 2023 off that higher projected 2021 base level. That forecast gives the company increasing confidence that it can deliver dividend growth of around 10% annually through at least 2022.

That earnings growth pace is impressive for a company of its size in the slow-growing utility sector. However, it's par for the course for NextEra Energy, which has historically grown its earnings at an above-average pace. For example, since 2004, the company has expanded its adjusted earnings per share at an 8.4% compound annual rate. That has given the utility the power to generate market-crushing total returns. Over the last decade, it has produced a 530% total shareholder return, which clobbered both the S&P 500 (257%) and the S&P 500 utility index (205%).

Given that historical outperformance, NextEra's outlook suggests it's poised to continue producing market-beating total returns over the next several years. Thus, it clearly doesn't need Duke to deliver above-average growth and returns. However, if it can buy its rival at a fair price, it could potentially enhance its already attractive long-term growth prospects.

NextEra wins even if it loses out on Duke Energy

There's a lot to like about NextEra's proposed strategic combination with Duke. However, it doesn't need to acquire Duke to be successful since its current path could see it produce above-average earnings growth and total returns. So investors shouldn't fret if merger talks go nowhere since that would be a much better outcome than if it overpaid to acquire Duke as that could water down its returns instead of enhancing them.