Volatility reared its ugly head last year. Stocks swooned as investors gauged the impact higher interest rates would have on the broader economy. Overall, the S&P 500 plummeted 20% from its peak on January 3rd by December 31st. Many stocks were down even more, especially high growth stocks.
If your portfolio was down more than the S&P 500, you might hold too many highly volatile stocks. The good news is that you can take some of the volatility out of your portfolio without sacrificing your upside potential. One way to do that is by adding NextEra Energy (NEE +0.08%), which offers a one-of-a-kind value proposition of high returns with much less volatility than the broader market.
A compelling combination
NextEra Energy stands out among companies in the S&P 500:
Image source: NextEra Energy Investor Relations Presentation.
As that graphic showcases, it's one of 384 members that boast having investment-grade credit metrics. That implies these companies can meet their financial obligations if economic conditions deteriorate, a good quality to have when we could experience a recession in 2023.
Of those investment-grade companies, 95 have market caps greater than $60 billion. That size gives these companies scale advantages and makes them big enough to be portfolio anchors.
While larger companies don't grow as fast as smaller ones, 55 have delivered at least 8% compound annual adjusted earnings-per-share growth over the last 15 years. That's faster than the S&P 500's median of 7%.
Of that remaining group, only 35 expect to deliver the earnings growth and dividend income necessary to produce annual total returns of 10% or greater in the 2021 to 2025 time frame. Meanwhile, even fewer companies (11) project to grow their dividends per share at around a 10% annual rate during that period, well above the S&P 500's 7% average.
However, only one of those remaining companies with that combination of returns and dividend growth has had a beta of less than 0.75 over the last five years: NextEra Energy. Beta is a metric that measures a stock's volatility relative to the S&P 500. A beta below 1.0 means it's less volatile, while a beta over 1.0 means it's more volatile. In NextEra Energy's case, it has had 75% of the S&P 500's volatility over the last five years.
The company's stable cash flow is a big driver of its lower beta. As a utility, it generates predictable earnings backed by long-term contracts and government-regulated rate structures.
NYSE: NEE
Key Data Points
Less volatility without sacrificing the return potential
Usually, lower-beta stocks are slower-growing companies that often don't have the return potential of their more volatile peers.
However, that's not the case with NextEra Energy. The company has a long history of delivering above-average earnings and dividend growth, which has helped it produce market-crushing total returns. Since 2016, NextEra has grown its adjusted earnings per share at an 8.4% compound annual rate while increasing its dividend at a 9.8% compound annual rate. Those dual growth drivers have helped power 16.5% average annualized total returns, obliterating the S&P 500's 9.2% total annualized return during that period. That's due largely to its focus on the fast-growing renewable energy market.
NextEra Energy expects to continue delivering above-average growth rates for the next several years. The clean energy company is investing $85 billion to $95 billion through 2025 to expand its utility operations in Florida, grow its renewable energy generating capacity, and build other clean energy infrastructure. These investments should power roughly 10% compound annual growth in its adjusted earnings per share from 2021's base to the high end of its guidance range for 2025. Meanwhile, it sees operating cash flow at or above that growth rate. These drivers should support dividend growth of about 10% annually through at least 2024.
With its dividend yielding 2% and earnings growing by as much as 10% per year, NextEra could deliver total annual returns of 12% or more. An investor could double their money in as little as six years at that rate. That's compelling upside potential for such a low-beta stock.
An attractive investment opportunity
NextEra Energy offers investors a unique blend of financial strength, size, and above-average earnings and dividend growth for a company with a low beta. It can be a stabilizing force in an investor's portfolio by producing strong returns total with less volatility. That makes it a great company to consider adding to your portfolio to reduce volatility without cutting into your upside potential.
