NextEra Energy (NEE 1.36%) reported another excellent quarter on 7/22. The largest U.S.-based regulated electric utility by market cap posted $0.81 in adjusted earnings per share (EPS), compared to $0.71 in adjusted EPS in Q2 2021. For the six months ended June 30 2022, it earned $1.54 in adjusted EPS, compared to $1.38 in adjusted EPS for the six months ended June 30, 2021. 

NextEra Energy's consistent earnings growth is a testament to its reliable portfolio and stable long-term contract model. Here's why NextEra Energy should continue to do well for decades to come, and why it is a dividend stock worth buying now.

Two people in hard hats and reflective vests point at a row of wind turbines on the horizon.

Image source: Getty Images.

Years of outperformance

The utility sector is known for slow and steady growth. Since utilities are a necessary cost of modern society, companies like NextEra are regulated to ensure fair pricing for consumers. Regulation limits upside, but also limits downside thanks to stable demand and long-term contracts.

By its nature, the utility sector tends to underperform the broader stock market over the long term because it probably won't grow as quickly as other cyclical sectors when the economy is doing well. But when the economy is under pressure, the utility sector tends to beat the broader stock market.

NextEra Energy has been an exception. It has produced a better total return than the S&P 500 for the past year, three years, five years, and 10-year time period -- all the while crushing the performance of the broader utility sector.

An evolving portfolio

The secret to NextEra's success is 35 years of aggressive decarbonization of its portfolio.

NextEra Energy Electricity Capacity by Fuel Type

Year

Oil

Nuclear

Purchased Power/Other

Coal

Natural Gas

Wind And Solar

1988

65%

18%

15%

2%

0%

0%

2001

41%

12%

11%

4%

26%

6%

2021

1%

9%

2%

1%

43%

44%

Data source: NextEra Energy 

In 1988, natural gas wasn't even part of NextEra's oil-dominate portfolio. In 2001, NextEra Energy Resources (NEER), the company's renewable arm, was only a few years old. But natural gas was growing in its share of NextEra's energy mix.

By 2005, Florida Power & Light (FPL), the company's core business, had a fuel mix consisting of 42% natural gas, 19% nuclear, 18% oil, 16% purchased power, and 5% coal. Today, FPL's portfolio is 67% natural gas, 20% nuclear, and 13% other. On top of that, NEER has 28 GW of generation capacity, 24 GW of which is wind and solar. Add it all up, and renewable energy makes up 44% of NextEra's electric capacity -- the largest share of any fuel type.

The last 20 years mark a transition away from coal toward natural gas for FPL and the establishment of NEER as the largest wind and solar operator in the world. The next 20 years mark a shift from natural gas to solar, energy storage, and green hydrogen for FPL, and continued growth for NEER.

By 2026, NEER's development program is expected to total between 27.7 gigawatts (GW) to 36.9 GW on top of its existing capacity. Meanwhile, FPL expects its portfolio to be 83% renewable by 2045. 

One of the challenges of pushing toward net-zero carbon emissions is balancing environmental benefits with economic gain. For example, it remains to be seen if oil and gas companies can grow their earnings by cutting oil and gas spending and ramping up renewable capital expenditures. NextEra Energy's transition away from coal and natural gas toward renewables has its risks. But the company's business model, which utilizes power purchase agreements that make revenue more predictable, makes a lot of economic sense.

Solar and onshore wind energy are already cost competitive with combined cycle natural gas at scale. However, high natural gas prices make renewables even more attractive. Companies are being pressured to cut their emissions by purchasing renewable energy. If they can do so at a cost that is similar to natural gas or even cheaper, then it's a no-brainer. In sum, NextEra's business model makes sense because costs are coming down to develop renewable infrastructure, the U.S. has some of the world's best onshore wind and solar locations, demand for renewable energy is growing, and alternatives such as natural gas are becoming more expensive.

The cost of growth

The company's development program hasn't been cheap. Although NextEra is posting positive adjusted earnings, NEER is losing money on a non-adjusted basis. For example, for the six months ended June 30, 2022, FPL made $0.94 per share, but NEER lost $0.69 per share for just $0.22 per share in non-adjusted earnings for NextEra as a whole. 

Not only has the growth taken a toll on non-adjusted earnings, but also on NextEra's balance sheet. The company's net total long-term debt position -- which is debt net of cash and equivalents -- has more than doubled in the last 10 years, and now sits at $58.2 billion.

NEE Net Total Long Term Debt (Quarterly) Chart

NEE Net Total Long Term Debt (Quarterly) data by YCharts

That looks pretty bad at first glance. However, the company's debt to capital and financial debt to equity ratios are actually healthy, suggesting that NextEra's growing net debt is more of a product of its business being much larger today than 10 years, and not irresponsible financial health.

A bright future

In the 15-year period from 2006 to 2021, NextEra Energy more than tripled its adjusted EPS -- growing it at an 8.4% compound annual growth rate (CAGR). Meanwhile, it quadrupled its dividends per share (DPS), growing them at a 9.8% CAGR. A few years ago the company became a Dividend Aristocrat, which is an S&P 500 component that has paid and raised its dividend for at least 25 consecutive years. 

Dividend investors look for consistent growth backed by a stable underlying business. And despite its aggressive spending and higher debt, NextEra's future looks bright. In its Q2 2022 investor presentation, the company reiterated its goal to grow adjusted EPS at around a 10% CAGR from 2021 to 2025 if it hits the top end of its guidance. It also expects to grow DPS at a 10% CAGR through at least 2024. In this vein, NextEra Energy is one of the few utilities that combines growing adjusted earnings and a rapidly growing dividend.