Long-term investors should have a distinct preference for owning well-run companies. Giant U.S. utility NextEra Energy (NEE -0.25%) is definitely such a company. But just because a company is well run doesn't mean it's worth buying. Here's why investors looking at NextEra will like it, and why they still need to think carefully before pulling the trigger.
A track record of success
NextEra Energy basically runs two businesses. The first is among the largest regulated utilities in the United States, centered around its Florida Power & Light operations. FP&L, as it is known more colloquially, provides power to around 5.6 million customers in Florida.
As a regulated utility, FP&L needs permission from the government for the rates it charges customers. That limits growth, but it also creates a solid base for the business, since regulators generally try to balance the financial needs of the utility, its investors, and customers when setting rates. Moreover, the spending that supports the company's rate requests really takes place outside of Wall Street's ups and downs, so growth tends to be fairly consistent, though slow, regardless of market gyrations. Not to mention that power is a basic necessity for modern existence. All in all, it is a very stable business.
The other side of NextEra Energy is called NextEra Energy Resources, which is a pretty nondescript name for what is actually one of the largest solar and wind power companies in the world. It's also a major player in the battery space via its collection of grid-level storage assets. There are two things worth noting here. First, NextEra is a key player in the hot renewable power sector, which is likely to see material growth in the years ahead. Second, it was early to the game, showing that an astute management team is running the bigger NextEra ship.
Although there are numerous ways to look at the success NextEra has achieved, one of the best is its string of 27 consecutive annual dividend increases. That makes the company a Dividend Aristocrat, a tough group to get into because it requires years of consistent and reliable performance.
More impressive, however, is the fact that dividend growth over the past decade has averaged around 10% per year. That's not only very high for utilities, which are generally slow and steady performers, but would also be a great number for just about any company.
All told, this is a very well-run company. But should you buy it?
The good and the bad
When it comes to investing, things can get complicated pretty quickly. In the case of NextEra, the difficulty is that investors are well aware of how great a company it is. That means that the stock usually trades at a premium price. For example, the current 2.1% dividend yield is near its lowest levels in the company's history. The average utility, meanwhile, using the Vanguard Utilities Index ETF as a proxy, yields around 3.1%. That's one full percentage point higher than NextEra's yield, which is also a nearly 50% difference in the income you would generate.
While NextEra's yield is higher than the measly 1.3% from an S&P 500 Index fund, it is not a stock that investors who are focused on generating material income would likely appreciate. And that low yield also speaks to a high valuation, which means that value investors would probably prefer other options as well. Two large groups of investors have now been knocked out of the mix.
But that doesn't mean that nobody would be interested in NextEra Energy. Notably, the company expects dividend growth between 2020 and 2023 to average around 10% per year, right in line with its historical trend. Dividend-growth investors will probably find that very appealing, especially since it will be built off of a slow and steady utility business that is supporting a fast-growing renewable power operation.
On that front, between 2021 and 2024, the company plans to add 1.5 times the renewable power generation it had at the end of 2019. In other words, it has a very concrete plan to live up to its growth commitments.
The final call
So is NextEra Energy a buy? It depends. If you are looking to generate as much income as possible from your investments today or have a value bias, then the answer is no. However, if you are a dividend growth investor looking to own a great company with solid prospects, then the answer is likely to be yes. You'll just need to go in knowing that you are paying a premium price for that dividend growth, which may be worth it for more-aggressive investors.