NextEra Energy (NEE 3.39%) is in an elite group. It's one of the 65 companies qualifying as a Dividend Aristocrat, S&P 500 components that have increased their dividend for at least 25 straight years. The company is currently up to 26 consecutive years of dividend increases and is one of only three utilities to make the cut.
One factor powering NextEra's success over the years has been its ability to expand beyond its core electric utility operations. The company has become a leader in producing renewable energy for other utilities, electricity transmission, and battery storage. It has also started investing in hydrogen. NextEra takes a toe-in-the-water approach to new businesses, starting small and gradually expanding. That's the blueprint it's following to build out what it eventually envisions will be a leading water utility business.
Diving deeper into the water sector
Earlier this month, NextEra unveiled that it agreed to acquire a wastewater system in Pennsylvania. It contains a treatment plant and collection system that serves about 7,500 customers. The company expects the deal to close in the second half of next year, assuming the receipt of regulatory approval.
The deal marks the second acquisition for NextEra's water segment. It furthers the company's goal of creating a national water utility. NextEra also agreed to acquire a water and wastewater utility with assets in eight counties across Texas for $45 million, in a deal that should close during this year's third quarter.
Why water?
Water utilities tend to produce very stable cash flow because demand for water and wastewater services is very consistent. Meanwhile, their rates rise as regulators approve increases. Because of these factors, several publicly traded water utilities stand out for their outstanding dividend growth track records. For example, American States Water and California Water Service Group are Dividend Kings with more than 50 years of consecutive annual dividend growth. Meanwhile, Essential Utilities' growth streak is up to 31 straight years.
Adding another steadily growing revenue stream is the near-term driver of the company's strategy to build a national water utility. NextEra aims to have a dozen businesses generating at least $100 million in annual revenue by 2025. That's up from seven last year and one in 2000. Those additional income streams should help give the company the power to achieve its goal of growing its adjusted earnings per share toward the high-end of its 6% to 8% annual target rate during that timeframe.
Meanwhile, water provides NextEra Energy with more optionality over the long term. The company recently revealed its bold Real Zero goal to eliminate carbon emissions from its operations by 2045 and help decarbonize the U.S. economy. Water is a key to achieving that goal. For starters, water is a crucial input for producing green hydrogen. The process uses renewable energy to power an electrolyzer that turns water into oxygen and hydrogen. Meanwhile, wastewater treatment plants emit methane, a greenhouse gas worse than carbon dioxide in warming the climate. However, companies can capture methane and turn it into carbon-neutral renewable natural gas. NextEra plans to use green hydrogen and renewable natural gas to replace natural gas at all its existing gas-fired power plants to achieve its Real Zero target.
By building a national water utility, NextEra will create another steadily growing income stream to support its dividend. On top of that, it positions the company for future upside potential because water and wastewater treatment plants could play critical roles in producing lower-emissions fuels. That could help power longer-term dividend growth.
Building another sustainable income stream
NextEra Energy's strategy of steadily adding new income streams has paid big dividends over the years. The company believes water can be a meaningful contributor in the future as it builds out a national water utility one deal at a time. That will enable the company to benefit from the steady cash flows these utilities produce while positioning it for the future role water assets could play in producing cleaner fuels. This new business segment should give NextEra more power to keep growing its dividend in the coming years.
