Electric utilities aren't exactly known as exciting stocks, but times are changing and giant NextEra Energy (NEE 1.13%) is leading the industry in a new direction. Here's a look at how this company is mixing the past with the future into one high-growth opportunity... for the right kind of investors.
The foundation behind NextEra's success is that it owns the largest utility in the state of Florida. This state has seen population growth for years as people move southward to a sunnier climate. The Sunshine State's low taxes doesn't hurt, either. This trend is expected to continue for years as Baby Boomers crest into retirement, and more residents means more customers for the utilities that serve them.
NextEra isn't sitting pat with what it already owns, either. It recently bought Gulf Power from peer The Southern Company, extending its reach in the state. The interesting thing here is that NextEra tends to be a very efficient operator, so it has been able to increase the profitability of Gulf Power by sharing best practices across the company. Thus, it increased its scale, and is benefiting from improved operations at its new asset.
These utility businesses also provide growth opportunities as NextEra invests in the businesses to ensure reliability and low pricing for customers. Such capital spending has to be approved by regulators, which then allow rate increases. NextEra is looking to spend as much as $28 billion on capital projects between 2019 and 2022. But still, this is generally a slow-growth business, and there are competitors in the utility space that are doing roughly similar things.
The growth engine
That brings us to the real reason why Wall Street is buzzing about NextEra Energy: renewable power. Off of a solid regulated utility foundation, the company has managed to build one of the largest solar and wind power companies on Earth. The combination of a slow and steady business with one that's focused on a massive growth opportunity has produced some impressive results.
The primary example to look at here is NextEra's dividend. For starters, the company has increased its dividend annually for 26 consecutive years, making it a Dividend Aristocrat. More notable than that, however, is that the annualized growth of that dividend over the past decade is a touch over 10%. That's an incredible number for a utility, and pretty impressive for just about any company, actually.
Better yet, NextEra thinks it can keep up that pace through at least 2022. Behind that expectation is a backlog of renewable power development projects that will double the company's renewable power capacity. NextEra has plans to spend over $30 billion on this side of the business between 2019 and 2022.
Worth a close look
All in all, NextEra is a utility with an extremely high dividend growth rate. For dividend growth investors looking to diversify their portfolios, it is definitely buzz-worthy.
That said, investors are well aware of the story here and the yield is a miserly 1.9%. That's toward the low end of the company's historical yield range. So while it is an exciting dividend growth stock, it is not appropriate for investors that have a value tilt or those looking to maximize the income they generate from their portfolios. Effectively, the fact that Wall Street is so interested in NextEra Energy has taken the stock out of the widows-and-orphans category and put it into the growth stock realm. That's not good or bad, but it does drastically change who should be buying it.