NextEra Energy (NEE -1.36%) has been a fantastic investment over the long term. Unfortunately, the past year has been a different story. The utility has lost nearly a third of its value, mainly due to concerns about how surging interest rates would affect its ability to continue growing.
This sell-off looks like a great buying opportunity. Here's a closer look at the utility's extremely attractive value proposition these days.
An inexpensive growth stock
Despite the concerns facing the company, NextEra Energy recently reiterated its long-term financial outlook.
Image source: NextEra Energy.
As that slide shows, the company expects its adjusted earnings per share to grow toward the upper end of its 6% to 8% annual rate through 2026. From 2021's baseline, this forecast implies it will grow at a 9.4% compound annual rate, an above-average pace for a utility.
With operating cash flow growing even faster, it should have the power to increase its dividend by around a 10% annual rate through at least next year, with more growth likely in future years. That would continue its elite dividend growth track record. It has increased its payout annually for more than a quarter-century, growing it at an 11% compound annual rate over the past decade.
Companies growing at above-average rates typically trade at a premium valuation compared to their peers, which has been the case for NextEra Energy until more recently. However, with shares selling off over the past year, it currently trades at a discount to its peers.
Image source: NextEra Energy.
As that slide shows, the company trades at a price/earnings-to-growth ratio (PEG ratio) of 2.0 times, below the 2.5 times average of its peer group. That gives it some room for its valuation multiple to expand. Add that to its attractive dividend (currently yielding 3.4%, more than double the S&P 500's 1.6% dividend yield) and above-average earnings growth rate, and NextEra Energy could have the power to produce double-digit total annual returns in the coming years.
In a class of its own
NextEra Energy further showcased its value proposition compared to other members of the S&P 500 with the following slide.
Image source: NextEra Energy.
The company highlights that it's one of 394 S&P 500 members with an investment-grade credit rating. Of those financially strong companies, 104 have market caps of more than $60 billion, giving them significant scale.
Less than half of those large-scale, financially strong companies have delivered adjusted earnings-per-share growth of more than 8% over the last 15 years. NextEra expects to deliver above-average earnings and dividend growth over the next few years. That positions it to generate total returns above 10% annually. It's one of less than two dozen companies that can deliver double-digit total returns and compound annual dividend growth above 9% over the 2022 to 2026 timeframe.
However, what sets it apart from that already elite group is its low volatility (as calculated by its beta). Over the last five years, its beta has been below 0.75 times, making it less volatile than the S&P 500 (which has a beta of 1.0 times). NextEra's beta means that if the S&P 500 declined by 10%, its stock should fall by less than 7.5%. While the company's stock has been more volatile than the market over the past year, it will likely revert to the mean and be even less volatile in the future, especially since it no longer trades at a premium valuation compared to its peers.
A great value proposition
NextEra Energy offers investors an above-average dividend yield and earnings growth rate for a relatively attractive price. That makes it a very compelling investment opportunity, especially considering its strong balance sheet and low beta. It offers investors a lower-risk way to earn a high total return. That makes it look like a screaming buy right now.
