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I Love NextEra Energy, but It's Getting Incredibly Expensive

By Matthew DiLallo - Feb 14, 2021 at 8:35AM

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The renewable-powered utility trades at a nosebleed valuation.

NextEra Energy (NEE -0.58%) 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.

A person weighing price and value on scales.

Image source: Getty Images.

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 (DUK 0.29%)Dominion Energy (D 0.62%), and Southern Company (SO 0.07%) 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 (XEL 0.31%) 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.

A closeup of a calculator with stacks of coins next to it.

Image source: Getty Images.

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 (EVRG 0.65%) 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.

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Stocks Mentioned

NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
NEE
$76.00 (-0.58%) $0.44
The Southern Company Stock Quote
The Southern Company
SO
$70.67 (0.07%) $0.05
Duke Energy Corporation Stock Quote
Duke Energy Corporation
DUK
$106.01 (0.29%) $0.31
Dominion Resources, Inc. Stock Quote
Dominion Resources, Inc.
D
$79.02 (0.62%) $0.49
Xcel Energy Inc. Stock Quote
Xcel Energy Inc.
XEL
$70.21 (0.31%) $0.22
Westar Energy, Inc. Stock Quote
Westar Energy, Inc.
EVRG
$65.16 (0.65%) $0.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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