The energy industry is going through a number of simultaneous disruptions that can leave large, established companies in a precarious position. Renewable energy is disrupting fossil fuel electricity generation, electric vehicles are growing market share versus internal combustion engines, and consumers have more options than ever with solar and energy storage in the home.
One company getting out in front of the market's changes is the utility giant NextEra Energy (NEE 1.36%). The company owns a solid regulated utility and is one of the largest renewable energy investors in the world. Instead of fighting the industry's changes, the company is leading the utility industry into the future, which is why it's a top energy stock today.
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Why NextEra Energy
NextEra Energy is primarily made up of three businesses, which span regulated utilities, NextEra Energy Resources, and NextEra Energy Partners. These companies each have their own set of strengths in the energy market.
- Florida Power & Light - This is a regulated utility with over 5.6 million customers, $12 billion in revenue, and $63 billion in total assets. The utility generates a traditionally regulated return like most utilities but has been focused on adding more solar, energy storage, and transmission and distribution assets to the portfolio the last few years.
- NextEra Energy Resources - It's a power company with 26 gigawatts (GW) of generation, consisting of 18 GW of wind, four GW of solar, two GW of nuclear, and two GW of natural gas and oil. The company has 13 GW of wind and solar in backlog and another three GW of energy storage. This is one of the largest renewable energy developers in the world.
- NextEra Energy Partners (NEP 4.77%)- The renewable financing arm has 5,830 megawatts (MW) of wind and solar assets it owns and operates. These assets have an average of 15 years remaining on contracts to sell electricity to a corporation or utility, providing predictable cash flow and dividends for investors and NextEra Energy.
This combination of assets gives NextEra Energy a clear path to growth long-term. Unlike most utilities, it's leveraged its un-regulated businesses to build renewable energy projects, gaining scale and expertise that most utilities can't match. That investment is translating into growing cash flows for the company beyond growing its regulated asset base.
A dividend investors should love
Today, NextEra Energy has a 2.1% dividend yield and management expects to increase the dividend payment to between $2.77 and $2.97 per share by 2023, or a yield of 4% at the midpoint based on today's stock price.
Utilities are often judged by their dividend and NextEra Energy is one of the best dividend stocks in the industry. Not only does it have a regulated utility to fall back on, but its two main subsidiaries are also in the business of developing large renewable energy projects that often have 20 years or more of contracted cash flow when they're built. That's a great growth business to be in for a utility.
I will point out that investment in renewable energy projects isn't cheap. NextEra Energy Resources spent a net of $5.8 billion on investment activities in 2020 and may continue to use debt to finance growth projects that it thinks have attractive long-term value. This leverage is a risk if projects underperform or a customer defaults. But management thinks it's worth the risk.
The future is bright for this utility
Not all utilities are in the strong position NextEra Energy is in. Electricity consumption has been stagnant for years and some utilities are fighting to make it harder for developers and homeowners to build wind and solar projects because they reduce the company's returns.
NextEra Energy serves the Florida market, which continues to grow its population base more quickly than the rest of the country, and as a result the regulated utility is growing. On top of that, NextEra Energy is using its low cost of capital as a utility to provide a differentiator in its renewable energy development business. This should allow it to develop projects more cost efficiently than rivals.
On top of the existing businesses, the company has shown a willingness to finance growth assets like energy storage, which could be a key asset class in the next few decades. Given all of this strength, this is a utility stock I'm excited to call my favorite energy stock right now.
