The best companies in the world have a reputation for bringing new products and services to market to maintain their competitive edge in a changing economy. Massive industry-leading companies might be able to get away with a lack of innovation for a while, but over time, complacently often leads to slowing growth.
NextEra Energy (NEE -0.42%), Equinor (EQNR 1.86%), and Deere (DE 0.66%) are similar in that they all have established businesses in legacy industries but are also aggressively investing in what they believe will be the next growth chapter in each of their fields. Here's what makes each of these dividend stocks a great buy now.
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1. A utility leading the energy transition
NextEra Energy is the largest utility by market cap in the United States. The stock's outperformance is largely due to its early mover advantage in transitioning away from coal (and, to a lesser extent, natural gas) toward renewables.
The company's two main business segments are Florida Power & Light (FPL) -- which absorbed Gulf Power earlier this year -- and NextEra Energy Resources (NEER).
FPL is the largest regulated electric utility in Florida. It continues to transition its power generation portfolio toward solar and expects a roughly 65% increase in zero carbon emission emitting power generation by the FPL system over the next decade when compared to 2021 levels.
Meanwhile, NEER -- the company's main renewable energy arm -- expects its total renewable capacity (from wind, solar, and other sources) to be between 22.7 gigawatts (GW) and 30 GW from 2021 through 2024.
NextEra Energy is already the largest renewable energy operator in North America. But what makes it unique is that it isn't slowing down its investments despite its leading position. As a regulated electric utility, it has projects that are ideally suited for risk-averse investors because they generate predictable cash flows that support the company's growing dividend and future development projects. NextEra has a 2.1% dividend yield at the time of this writing.
2. From offshore oil and gas to offshore wind
Equinor is Norway's biggest oil and gas company. Considered one of the world's largest integrated majors, Equinor has spent decades being the dominant player in the North Sea.
However, the company's production has slowed in recent years despite sizable investments in the Gulf of Mexico and offshore Brazil. For example, first half 2022 production was 2% lower than first half 2021 production and full year 2022 production is expected to be just 2% higher than full-year 2021 production. Equinor's 2021 production of 2.079 million barrels of oil equivalent per day (boe/d) was practically flat compared to 2.08 million boe/d in 2017 and just 7% higher than 1.94 million boe/d the company averaged in 2013. That gives Equinor's production a compound annual growth rate of less than 1% for the last 10 years.
One reason for the low growth is that Equinor has aggressive carbon reduction goals and is investing heavily in renewable energy, carbon capture and storage, and offshore wind power.
Equinor has low oil and gas capital expenditures (capex) and one of the lowest production costs of any oil and gas major, which allows it to rake in gobs of free cash flow (FCF). Despite being one of the smaller majors by market cap and having less than a third of ExxonMobil's market cap, Equinor generated the equivalent of more than half of ExxonMobil's FCF in 2021 and the most FCF as a percentage of market cap of any major.
EQNR free cash flow (annual). Data by YCharts.
Equinor continues to make selective investments in oil and gas. However, it must diversify its portfolio to include renewables and carbon capture and storage if it wants to achieve its medium- and long-term carbon reduction goals. According to its 2022 energy transition plan, the company aims to boost oil and gas production by just 2% between 2021 and 2022 while lowering the carbon intensity of its oil and gas portfolio. It has earmarked $23 billion in renewable energy capex between 2021 and 2026 to reach an installed capacity of 12 GW to 16 GW by 2030. However, we could see Equinor reallocate some of its renewable spending toward oil and gas in response to increasing demand in Europe due to the Russia-Ukraine conflict.
In many ways, Equinor is similar to NextEra Energy in that it still operates a sizable fossil-fuel-based asset portfolio but is allocating most of its investments toward lower carbon solutions. It has a dividend yield of 2.2% at the time of this writing.
3. Cultivating decades of growth
Like NextEra Energy and Equinor, heavy-equipment manufacturer Deere has set aggressive sustainability goals. And unlike many companies that simply say they will be carbon neutral by 2050, Deere's goals are based on 2026 and 2030 targets.
Known as its Leap Ambitions plans, Deere wants to grow its market share in production and precision agriculture, small agriculture and turf, construction, and forestry by offering lower-carbon solutions like electric and hybrid models as well as spearheading automation across its end markets.
Most notable is Deere's goal to have 100% of small agriculture equipment connectively enabled by 2026, and to deliver over 20 electric and hybrid product models. Elsewhere, the company aims to lower its carbon-dioxide-equivalent emissions, improve nitrogen-use efficiency, and achieve 95% recycled product content by 2030. It also plans to reduce other emissions by 50% by that year.
Deere is an excellent example of a legacy company and a well-known American brand that plans to achieve long-term growth and gain customer trust through sustainable business practices.
The results show the strategy is working. Deere booked record profit in 2021 and forecasts an even better year in 2022. Its dividend yield is only 1.5%, but the company prioritizes share repurchases and organic investment over the dividend -- so its payout is more of a cherry on top of an excellent underlying investment thesis.
High yield isn't everything
NextEra Energy, Equinor, and Deere aren't high-yield dividend stocks by any means. But they are excellent companies that stand a good chance of growing their businesses over time and supporting their dividends with cash, not debt. In this vein, all three companies could deliver better long-term value than a high-yield dividend stock with weaker growth prospects.
