The average utility, using the Vanguard Utilities Index ETF (VPU +0.98%) as a proxy, has a yield of 3.2%. By comparison, NextEra Energy (NEE +1.21%) has a yield of just 2.5%. Why the difference? NextEra Energy is not your "average" utility. Here's why a lot of investors will find this dividend growth stock worth a deep dive.
The basics
NextEra Energy is really two companies in one. The boring side of the business is the company's regulated electric utility operations in Florida, largely consisting of Florida Power & Light. It is one of the largest utilities in the United States and continues to see increasing demand driven by population growth, which makes it a fundamentally strong business. This is the solid core on which the company has layered NextEra Energy Resources, which is a fairly nondescript name for something that is quite exciting.
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NextEra Energy Resources claims to be the world's largest producer of wind and solar power. It is a key growth engine for NextEra Energy, as the world continues its transition away from carbon fuels and toward cleaner alternatives. At the end of 2022, NextEra Energy Resources owned 30 gigawatts of production capacity.
The combination of these two businesses has produced impressive financial results. The company's adjusted earnings per share have grown at a compound annual rate of 10% over the past decade -- the highest among its peers. The dividend has been increased at a touch over 10% a year, on average. Utilities are generally considered slow and steady performers, so these two metrics are really quite astounding and highlight why NextEra Energy is not your "average" utility stock.
The problem for investors
Wall Street knows just how strong NextEra Energy's performance has been. That's why its dividend yield is below the average for a utility. It's also toward the low end of the company's own yield range over the past decade. That suggests that investors are affording NextEra Energy a premium price.
That is buttressed by NextEra Energy's price-to-earnings (P/E) ratio, which sits at around 36. That compares with P/E ratios of around 20 for similarly sized peers such as Exelon and Southern Company. The weighted average P/E ratio for the Vanguard Utilities Index ETF is 22.5. NextEra Energy is not an appropriate choice for those who prefer value-oriented investments.
NYSE: NEE
Key Data Points
Yet NextEra Energy doesn't think its growth is set to slow in any material way. For example, as it reported full-year 2022 financial results, it extended its outlook to 2026 with adjusted earnings pegged to grow between 6% and 8% a year. Dividend growth of 10% is expected through at least 2024. With that kind of outlook in what is normally a stodgy industry, it's little wonder that investors are affording NextEra Energy a premium price.
Backing that growth is $32 billion to $34 billion in capital spending plans at the company's Florida utility over the next three years. A 19-gigawatt backlog of signed renewable-energy contracts is also waiting to be built. However, management's high-end target is to build as much as 42 gigawatts by 2026, which would more than double its capacity. Given the company's successful history in each of its primary businesses, there's no reason to believe it can't live up to management's lofty expectations.
Still, investors might want to monitor the company's progress, as the rising interest-rate environment and inflation both increase the costs of big capital projects. Higher costs can result in the cancelation of projects if they no longer make economic sense. In all, trust but verify is probably the correct stance here.
Best for dividend growth investors
As already noted, NextEra Energy probably won't interest value investors. However, those in search of dividend growth may want to consider this utility. You'll be paying a premium, but it would be hard to find another utility with the growth prospects, business strengths, and dividend record on offer here. (The annual dividend has been increased annually for more than 25 years.) In fact, NextEra Energy could offer a very attractive diversification opportunity for a dividend growth portfolio, as it would add a sector to the mix -- utilities -- that generally isn't known for rapid dividend growth.
