Please ensure Javascript is enabled for purposes of website accessibility

Is NextEra Energy Stock a Buy?

By Rekha Khandelwal - Mar 23, 2021 at 7:23AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The top utility is doing a commendable job of harnessing renewable energy sources profitably.

One of the largest electric utilities in the U.S., NextEra Energy (NEE 2.92%), is also the world's largest generator of wind and solar power. The company has 18 gigawatts of wind and 4 gigawatts of solar generation capacity, in addition to a combined wind and solar projects backlog of 11 gigawatts. NextEra Energy's stock has significantly outperformed its large utility peers in the last few years. Let's take a closer look at the factors driving this outperformance as well as whether NextEra Energy can continue to outpace peers in the future.

Top notch performance

NextEra Energy has delivered an impressive performance over the years. Its adjusted earnings per share (EPS) grew by 10.5% last year. In 15 years, NextEra grew its adjusted EPS at a compound annual growth rate (CAGR) of around 8.7%. During the same time frame, it grew its per-share dividend at a CAGR of around 9.6%. In addition to a steady growth in its regulated electric utility business, NextEra Energy has remarkably grown its competitive wholesale energy business.

Windmills along the sea coast

Image source: Getty Images.

NextEra Energy Resources, the company's wholesale energy segment, generates substantially all its energy from renewable sources. Wind and solar accounted for more than 70% of the segment's generation last year. NextEra Energy is focused to grow its renewables generation portfolio. It hopes to add around 23 to 30 gigawatts of renewables generation capacity by the year 2024. The company's upbeat outlook for renewables generation stems from years of its profitable operation in this segment.

Growth outlook

NextEra Energy expects to continue its high growth in the coming years. The utility expects adjusted EPS to range from $2.40 to $2.54 for 2021, which, at its midpoint, is nearly 7% higher than 2020. Moreover, it expects from 6% to 8% growth in adjusted EPS over the next two years.

NextEra spent $14 billion on capital projects in 2020. The company expects to spend around $44 billion on capital projects through 2025, including nearly $4 billion on wind and solar assets. 

In addition to wind and solar, NextEra Energy Resources is focusing on battery storage projects. Once the current backlog gets completed, the company will have 3 gigawatts of battery storage capacity. These projects will enhance the company's ability to meet customer needs even from uneven renewables-based generation.

Valuation

With a forward price-to-earnings ratio of 29, NextEra Energy looks pricey compared to its top utility peers, which are all trading at forward P/E ratios of around 18. NextEra Energy stock's greater rise than its peers in the last couple of years has pushed its valuation higher.

However, if we consider NextEra Energy's expected earnings growth, its valuation looks much better. NextEra's forward price-earnings-to-growth or PEG ratio is 0.4 compared to Southern Company's (SO 2.08%) ratio of 1.4.

NEE PE Ratio (Forward) Chart

NEE PE Ratio (Forward) data by YCharts

The PEG ratio is a useful metric to compare companies with significantly different growth rates. A lower ratio is better. Simply put, a company growing at a higher rate should trade at a higher P/E than another one that is growing at a lower rate, all other things being equal. Generally, a ratio below one indicates that a stock isn't overpriced, based on its expected growth.

Conclusion

NextEra Energy is poised to benefit from the ever-increasing use of renewable energy sources. This is a long-term trend here to stay. Due to the recent fall in renewable energy stocks, including NextEra Energy, such stocks are now trading at better valuations compared to a few months ago. NextEra Energy's steady operations combined with its huge renewables portfolio makes it an attractive buy. Its growth plans and outlook inspire confidence in its ability to continue generating peer-leading dividend growth. The stock's recent pullback offers an entry point to build your position for the long term in this top utility.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
NEE
$74.67 (2.92%) $2.12
The Southern Company Stock Quote
The Southern Company
SO
$75.69 (2.08%) $1.54

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.