Utilities are generally thought of as boring, slow-growth stocks. NextEra Energy (NEE 0.45%) doesn't fit that mold, because it has long been a growth-oriented utility with a large and dedicated following on Wall Street. The big story here, an expanding renewable power business, should continue to drive long-term performance even if there is near-term price volatility. The last three years are actually pretty telling in this regard.
Big (dividend) growth
Leading up to the coronavirus pandemic in 2020, investors were enamored of NextEra's clean energy business. That led Wall Street to place a high valuation on the shares relative to other utility stocks. This is completely reasonable, since the company's average annualized dividend growth rate over the past decade is nearly 11%. That's an impressive number for any company, but for a utility it's pretty incredible.
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The trade-off, of course, is that a premium price has left the yield notably below many of the company's most relevant peers. The yield is currently around 2%, well below the 3% dividend yield of the average utility, using the Vanguard Utilities Index ETF as a proxy. Still, for dividend growth investors, that pace of dividend growth should be very alluring.
The company can achieve such rapid dividend growth because it's really two businesses in one. NextEra owns the largest regulated electric utility in Florida, Florida Power & Light. The state of Florida has benefited from in-migration for tax and weather purposes for many years. Thus, NextEra has a solid, slow-growing foundation from which it is building out its second major business line: Renewable power.
At this point, NextEra is one of the largest generators of solar and wind power in the world. And it has plans to keep investing here, with a 20-gigawatt backlog worth of signed contracts that it can build out. That said, management believes that it may actually be able to build as much as 36.9 gigawatts of new capacity between 2022 and 2025, more than doubling its current capacity of 28 gigawatts.
There's a lot to like here, and investors can clearly see the long-term appeal. At least they can most of the time. Indeed, when Wall Street turns negative, it often throws out the baby with the bathwater. Some numbers will help.
A quick look at stock performance
If you had bought $1,000 worth of NextEra stock three years ago, which would have been just before the 2020 pandemic-driven bear market, you would have roughly $1,450 today, not including dividends. If you had, instead, purchased an S&P 500 Index fund, you'd only have around $1,250. Buying the Vanguard Utilities Index ETF, meanwhile, would have left you with about $1,100. Clearly, sticking with the strong growth story offered by NextEra paid off.
But here's where things get interesting. NextEra Energy stock plunged more than 30% during the early 2020 bear market. That was roughly in line with the drops in the average utility and the S&P 500. Your $1,000 investment would have been something on the order of $775 at the worst point in March 2020.
By the end of 2020, however, the S&P 500 had largely recovered, and so had NextEra, as investors jumped back into the market and, notably, growth-oriented investments. The average utility, meanwhile, ended that year down 12%. Basically, investors recognized the importance of NextEra's long-term growth potential and rewarded it even during uncertain times.
Since getting back to breakeven in 2021, NextEra's stock has seen a few big drawdowns of 15% or more. There have been various reasons for this, but the bigger takeaway is that, despite the volatility, the growth story remains intact. And investors have rewarded the stock for its still bright long-term prospects, as noted by the outperformance over the full three-year period. That suggests that long-term investors should probably view drawdowns here as buying opportunities.
Nothing goes up or down in a straight line
Wall Street is constantly zigging and zagging along, driven by world events and investor emotions. NextEra Energy's stock performance over the past three years has been volatile, but it shows that, over longer periods of time, investors reward companies for success.
If you have been watching NextEra but have been worried about pushing the buy button, consider keeping it on your watch list. It's highly likely that a large drawdown driven by investors irrationally selling everything out of fear -- even though NextEra's fundamentals and outlook will probably remain unchanged -- will eventually give you a buying opportunity.
