NextEra Energy (NEE 1.13%) stock jumped 1.75% on Friday last week despite a down day on the stock market as Wall Street reacted favorably to its Q2 2022 results. If you haven't heard of NextEra Energy, it's the largest U.S.-based utility by market cap. In fact, it is valued at nearly double the value of the second-largest U.S.-based utility by market cap, Duke Energy.
Aside from its size, what makes NextEra Energy unique is that it operates the largest portfolio of power generation assets in the country, and has been the industry leader when it comes to investing in renewable energy and storage. Here's why NextEra Energy stands out as a top renewable energy stock for the second half of 2022 and beyond.
No ordinary utility
NextEra Energy has two key business segments: Florida Power & Light (FPL), which is the largest electric utility in the U.S. on its own and serves over 12 million Floridians, and NextEra Energy Resources (NEER), which is the company's renewable energy arm. Investors should note that Gulf Power, which used to be the third segment, was absorbed by FPL earlier this year.
In 2021, 67% of FPL's portfolio was natural gas, and 20% was nuclear. By 2045, the company estimates 83% of FPL's portfolio will be solar, battery storage, and green hydrogen, while 16% will be nuclear, and the final 1% will be renewable natural gas (RNG). Green hydrogen is hydrogen produced from renewable energy sources, unlike blue hydrogen, which is produced from natural gas. RNG is natural gas produced from municipal solid waste, manure, wastewater, or some other input that isn't hydrocarbons.
For now, FPL continues to be NextEra Energy's main cash cow. The vast majority of its assets are contracted under long-term power purchase agreements that produce stable earnings throughout market cycles. This business model is why regulated electric utilities like NextEra Energy are normally seen as recession-resistant businesses, as opposed to more cyclical sectors of the economy like consumer discretionary and industrials.
An excellent business model
In the most recent quarter, FPL produced $0.50 of adjusted earnings per share (EPS), representing 11% growth compared to the same quarter last year. But NEER produced $0.35 in adjusted EPS, which was 21% higher than the same quarter a year ago. For years, the general strategy for NextEra has been to use FPL's earnings to grow NextEra's backlog of renewable energy projects and eventually scale NEER toward profitability. That plan is working.
NEER operates a staggering 28 gigawatts (28 GW) of renewable energy capacity across the United States and Canada, consisting of about 20 GW from wind, 4 GW from solar, 2 GW from nuclear, and 2 GW from natural gas and oil. Keep in mind that FPL's decarbonization plan is predominantly driven by solar, not wind, mainly because of Florida's ideal solar climate. By contrast, NEER's portfolio is more geographically diverse than FPL's. And although NEER's existing portfolio is mostly wind, solar leads its development program.
In its Q2 2022 presentation, NEER reported 27.7 GW to 36.9 GW of expected originations between 2022 and 2025, including 9.5GW to 12.9 GW between 2022 and 2023. In Q2 alone, NEER added over 2 GW of new renewable and storage to its backlog.
What has long separated NextEra Energy from other utilities is that it was arguably the most aggressive early investor in renewable electricity generation. It set the tone, and today virtually every major regulated electric utility is following suit with its own renewable energy investments. But despite that early lead, NextEra Energy isn't slowing down its renewable energy investments -- a trend that NEER forecasts will add more capacity in the next four years than it has after over a decade of investments, even though NEER is already the world's largest wind and solar energy operator.
Positioned for long-term growth
NextEra Energy has successfully transformed its portfolio to majority renewable energy. However, its healthy backlog and multi-decade plans show its growth is far from slowing down. As mentioned, NextEra Energy has an advantage over other utilities because its roots are in solar-supporting Florida, whereas NEER operates assets around the U.S. (most of its wind assets are in the Great Plains).
NextEra Energy plans to grow its adjusted EPS at around a 10% compound annual growth rate between 2021 and the high end of its 2025 forecast, while also growing its dividend by around 10% through at least 2024. With a dividend yield of 2.1% and a leading portfolio, NextEra Energy is an ideal core renewable energy dividend stock to provide the foundation for a diversified portfolio.