Market turbulence is showing no signs of subsiding as investors question high-flying growth stocks and flock toward companies with earnings they can count on.
NextEra Energy (NEE 0.51%) finds itself somewhat in between. The stock has sold off year to date, in part because it's been up big in recent years. But it also has stable earnings and growth too. What's more, it has a growing dividend and is a new member of the Dividend Aristocrat list of S&P 500 components that have paid and raised their dividends for at least 25 consecutive years.
Here's why NextEra Energy stands out as a great buy now.
Image source: Getty Images.
Why investors are gravitating toward utility stocks right now
Year to date, only three out of the 11 sectors in the S&P 500 have produced a positive total return -- energy, utilities, and consumer staples.
Oil and gas prices have rocketed higher as geopolitical tensions clash with supply demand imbalances. So it's not surprising that oil and gas stocks are having their time in the sun. However, the story behind utilities and consumer staples is more commonplace.
Utilities and consumer staples companies have stable cash flows despite the economic cycles. They also have low to moderate growth and tend to pay generous dividends. This makes the utility and consumer staples sectors safe havens amid a stock market sell-off. On the flip side, the three worst-performing sectors so far this year are technology, communication, and consumer discretionary because rising interest rates and inflation can stall an economy, which leads to less growth.
Outsized returns
NextEra Energy is the largest U.S. utility by market cap, and it's not even close. The company is over 80% more valuable than the second-largest U.S. utility by market cap -- Duke Energy.
Many major utility stocks are hitting all-time highs. But NextEra Energy stock is underperforming the sector and is down 15% on the year. Part of the reason for its underperformance may be due to its industry-leading return over the last three-year, five-year, and 10-year time frame -- during which NextEra Energy was one of the few utility stocks that crushed the utility sector but also the S&P 500.
|
Security |
Year-to-Date Total Return |
1-Year Total Return |
3-Year Total Return |
5-Year Total Return |
10-Year Total Return |
|---|---|---|---|---|---|
|
NextEra Energy |
-11% |
7% |
85% |
184% |
601% |
|
Duke Energy |
11% |
21% |
44% |
72% |
188% |
|
Southern Company |
12% |
24% |
64% |
93% |
168% |
|
Dominion Energy |
12% |
17% |
29% |
39% |
158% |
|
Xcel Energy |
11% |
11% |
44% |
91% |
297% |
|
Utilities Select Sector SPDR ETF |
7% |
19% |
44% |
73% |
213% |
|
S&P 500 |
-7% |
8% |
59% |
106% |
291% |
Data source: YCharts
Another reason is that many leading utility stocks were undervalued and had some catching up to do -- so to speak -- relative to their earnings growth. And one more reason is that other utilities have caught wind of the effectiveness of NextEra's ambitious renewable energy investment strategy and have since earmarked more and more capital of their own toward sustainable practices and renewable electricity generation.
NextEra Energy's advantage
NextEra Energy began investing in renewable energy earlier than many of its competitors. Today, it is the largest wind and solar energy operator in the world. That head start gives NextEra an advantage both in its portfolio positioning and its experience. Experience matters when the renewable energy industry is under strain and interest rates are rising.
When a legacy industry suddenly begins to dramatically change by following in the footsteps of a single company, that's generally a very good sign that the company is doing something right. In the auto industry, it was Tesla. With mobile phones, it was Apple. And in the regulated electric utility industry, it is NextEra Energy.
The difference is that NextEra Energy doesn't really compete with other utilities in the same way that Apple competes with Microsoft and Alphabet, or Tesla competes with new and established automakers. Rather, NextEra has its core customer base in Florida and is vertically integrated, so it controls power generation, transmission, and distribution. Its portfolio now includes almost no coal and less nuclear, but still a good amount of natural gas and a lot more wind and solar.
Infrastructure development is capital intensive and takes a long time. You can't simply flip a switch and shift the grid toward 100% renewable energy. Rather, NextEra's strategy is to build its low-carbon infrastructure early so that it is prepared to capture market share as consumers and regulators demand more renewable energy.
In the meantime, NextEra Energy believes it will be able to grow its dividends per share by roughly 10% per year through at least this year, and it expects adjusted earnings per share to grow by 6% to 8% per year between 2023 and 2025 off of a 2022 base.
A utility that is built to last
NextEra Energy is a great stock to buy now because long-term contracts and relatively fixed demand for its services insulate it from the harmful effects of inflation. It also has experience in the renewable energy industry, which should give it an advantage when it comes to entering new agreements. Finally, NextEra Energy has a balanced portfolio of fossil fuels and renewable energy that supports steady earnings and dividend growth.
Add it all up, and you have a top-tier safe stock that investors can count on for its 1.9% dividend yield and long-term growth.
