NextEra Energy (NEE 1.29%) is an interesting utility, being that it mixes two energy businesses in one -- a regulated utility and a clean energy company. While some of the company's regulated utility peers are refocusing on their core utility operations, NextEra is happily growing its clean energy business using its regulated utility as a foundation for that growth. Here's a look at what has been achieved so far and what management believes is on tap in the future.
Very pleasing numbers
NextEra Energy has increased its dividend annually for nearly three decades. That's an impressive streak that shows the company is dedicated to rewarding shareholders with dividend growth in good markets and bad ones. Equally impressive, noting that NextEra is a utility, is that the dividend has grown at a compound annual rate of roughly 10% over the past decade. In fact, that number is fairly consistent, with roughly 10% growth over the trailing one-, three-, and five-year periods, as well.
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If you are on the lookout for a reliable dividend growth stock, NextEra Energy would easily fit the bill. However, don't forget that this company is a utility, a sector of the market usually associated with slow and steady performance. By comparison, similarly large Southern Company (SO 1.11%), Duke Energy (DUK 0.84%), and American Electric Power (AEP 0.88%) have grown their dividends in the low to mid single digits annually over the past decade. In this way, NextEra Energy is something of a rare gem in the utility sector.
Of course, this hasn't gone unnoticed. Some comparisons will help set the stage here. Duke Energy's dividend yield is 4.1%. The Southern Company has a dividend yield of 3.75%. American Electric Power's yield is 3.6%. NextEra's dividend yield is a relatively miserly 2.5% or so. Essentially, investors have placed a premium price on NextEra Energy and its robust dividend growth.
The future is bright
That's actually quite fitting, assuming that management can live up to its growth expectations. They seem quite upbeat on doing so, though, noting that "We will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted EPS expectations ranges through 2026" in the company's first-quarter 2023 earnings presentation.
What are those expectations? For starters, NextEra is putting money to work in its regulated business to ensure reliable power access, supply its growing customer base, and increasingly shift toward cleaner energy sources. On the clean energy side, which lives within the company's NextEra Energy Resources division, the goal is to at least double its capacity by the end of 2026. Both will work hand-in-hand to support the company's earnings and dividend growth plans.
Those plans, meanwhile, are impressive. On the earnings front, NextEra believes it will grow at a 6% to 8% clip each year through 2026. That, in turn, will support a continuation of the dividend growth trend of 10% annual increases through at least 2024. The company's modest 50% or so dividend payout ratio, which is well below that of its closest peers, suggests that there is ample room for dividend growth to outpace earnings growth. These would be strong numbers for most companies, but for a utility, they are downright impressive.
There are headwinds to NextEra's plans. The utility's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio has increased in recent years, which means less room for debt on the balance sheet. But leverage is still at the low end of its closest peers, so this is something to watch but not something to necessarily worry about right now. And higher interest rates means that capital investments have a higher hurdle rate to get approved, which can reduce the list of worthwhile investment opportunities.
That said, regulators are likely to take higher interest rates into consideration when working with the company, so this side of the business should be fine. On the clean energy side, which is not regulated, there may be a lag but the market has to adjust or investment will dry up, which isn't an option if customers want to meet clean energy guidelines and commitments. In other words, NextEra is highly likely to live up to its projections over the long term even if there is some near-term turbulence.
The caveat
As highlighted above, NextEra Energy has been rewarded for its growth with a premium valuation. It is rarely cheap, so value investors probably won't be interested here. That said, with the stock around 15% below its most recent high-water mark, the price-to-earnings ratio is about 23 times, which is below the five-year average of 39 times. That suggests that now could actually be a decent time to add this dividend grower to your portfolio, assuming you are willing to pay a premium over other utilities for more robust dividend growth. Indeed, NextEra Energy is rarely a screaming buy, but a fair price for this great company is an opportunity that doesn't come around all that often.
