Utilities can be great investments. They provide resources like electricity, gas, and water -- things everyone needs -- and the often regulated nature of the industry prevents competition from encroaching on business. Utility and energy producer NextEra Energy (NEE -1.05%) is the world's largest electric utility by market cap and a dividend rockstar.
This Dividend Aristocrat has crushed the S&P 500 since its inception while raising its dividend for 28 consecutive years. This stock offers a combination of growth and dividends that's hard to match -- can it continue? Here is why the stock could deliver dividends to shareholders well into the future and be a core holding for any long-term portfolio.
Not just any utility company
NextEra is an energy company with a couple of key cogs. It owns Florida Power & Light, the largest electric utility in the United States. It sells electricity to more than 5.8 million accounts in Florida, powering the needs of 12 million people. Utility companies work with regulators to establish pricing for the energy they sell in exchange for making capital investments to upgrade and maintain their energy infrastructure. This typically makes utility companies stable businesses.
NextEra is also a clean energy company. Its Energy Resources segment operates assets generating approximately 28 gigawatts of clean energy (primarily wind and solar), making it the largest renewable energy producer in North America.
NEE Cash from Operations (TTM) data by YCharts
This combination has produced steady growth. Operating cash flow has climbed steadily over the past decade, helping fuel dividend increases. NextEra's dividend payout ratio is approximately 37% of its operating cash; it uses the rest to fund projects.
Why growth should continue
NextEra has delivered enough growth to generate significant returns for shareholders. Non-GAAP earnings per share (EPS) have grown by 8.4% annually since 2006, and the dividend has been raised by 9.8% on average. The stock's lifetime total returns surpass 19,000%, easily outpacing the S&P 500 over that time. But will future results look like this?
The company is still investing to fund new developments, including a backlog of 20 gigawatts' worth of signed contracts. Management believes NextEra's EPS and the dividend will grow by an average of 10% annually through at least 2024.
Image source: NextEra Energy.
Looking further out, the recently signed Inflation Reduction Act could offer favorable conditions for continued growth. The bill contains several tax credits and incentives to help drive a long-term shift in the energy grid toward cleaner energy sources. NextEra's role as an industry leader (it captured about 50% of the wind energy market in 2021) should position it to benefit from the legislation.
Something to watch: The balance sheet
NextEra has increased its investments over the past couple of years, and long-term debt has roughly doubled over the past few years. That has pushed leverage to a debt-to-EBITDA ratio of 6.8; investors should watch it moving forward. NextEra has many physical assets on its balance sheet and has produced reliable operating cash flow over the years, so it can probably get away with it more than some companies might. S&P Global affirmed the company's investment-grade A- rating earlier this year.
NEE Total Long-Term Debt (Quarterly) data by YCharts
Given the company's expected growth over the coming years, investors probably don't have to sweat the balance sheet unless the company's credit rating slips from here.
Assuming NextEra's borrowing doesn't get ahead of itself, the stock seems like it can continue delivering a combination of growth and passive income for shareholders. Renewable energy has political momentum, and NextEra's role as one of the most prominent players in that space could bring more success in the years ahead.
