NextEra Energy (NYSE:NEE) has done a masterful job creating shareholder value over the years. During the last decade, the utility has generated an eye-popping total return of 700%. That has obliterated its peers' return (the S&P 500 Utility Index's total return was 191% during that timeframe) and the S&P 500 (267%). Powering that market-crushing performance has been NextEra's peer-leading earnings-per-share growth of 8% compounded annually over the past decade versus less than 3%, on average, for the top 10 power companies, due in large part to its focus on renewable energy.

However, all that outperformance has NextEra trading at a premium valuation compared to its utility peers. While NextEra deserves to trade at some premium, its current valuation is starting to get a little uncomfortable, given its relative growth rate.

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A nosebleed valuation

Shares of NextEra have run up nearly 40% since the start of 2020. However, its adjusted earnings per share only increased by 10.5% in 2020. Furthermore, they're on track to grow by about 7% in 2021 at the midpoint of its current forecast. NextEra now trades at more than 30 times its forward earnings. That's quite a hefty valuation multiple for a utility. 

For comparison's sake, large-scale rivals Duke Energy (NYSE:DUK)Dominion Energy (NYSE:D), and Southern Company (NYSE:SO) trade at a mid-teens multiple of their forward earnings. While they're growing at a slower rate -- and aren't putting as heavy an emphasis on renewables as NextEra -- it's still tough to justify paying nearly twice as much for NextEra relative to other large-scale utilities.

Meanwhile, it trades at a hefty premium to other utilities with a similarly strong renewable-powered growth plan. For example, Xcel Energy (NASDAQ:XEL) expects to grow its earnings at a 5% to 7% annual pace through 2024 -- powered by its pivot toward clean energy -- which is slightly slower than NextEra's 6% to 8% yearly projected growth rate through 2023. Despite those similar profiles, Xcel only trades at about 20 times its forward earnings, implying NextEra fetches a roughly 50% premium.

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Even NextEra knows its stock is expensive

NextEra's management team is fully aware that its stock trades at a premium price. That's why they've been exploring using shares as currency to make a large acquisition. The company made a takeover approach to Duke Energy last year, valuing its rival at around $60 billion. However, Duke rejected that bid fearing it wouldn't win regulatory approval.  

NextEra also made an all-stock offer to acquire Evergy (NYSE:EVRG) for about $15 billion. However, that rival also rejected its bid because of an inadequate price and the potential for regulatory hurdles. 

The company seems to be looking for a deal that utilizes its premium stock value to make a highly accretive transaction. However, the company also appears to be cautious not to overpay since it wants a deal that would create shareholder value. CEO James Robo made that clear, stating at an industry conference last year that it wouldn't attempt a hostile takeover attempt since that would probably require it significantly overpaying for a target. Instead, it's seeking a mutually beneficial transaction that would create value for all stakeholders.  

One pricey utility stock

NextEra's valuation is getting a bit too rich for my liking. While I wouldn't sell shares -- I plan on holding for decades given its leverage to the energy transition -- I probably won't buy more anytime soon. I want to wait for a sizable pullback, see it grow into its valuation, or for NextEra to secure a highly value accretive transaction before I increase my allocation to this scorching hot utility so that I don't get burned if the stock cools off.

This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.