Share prices of NextEra Energy (NEE -1.36%) have fallen 27.1% so far in 2023, leaving the dividend yield at 3.1%. That's simply too cheap to pass up for a dividend that's grown at an 11% compound annual growth rate since 2023.
The utility faced pressure from higher interest rates and the potential that some renewable energy projects won't be built economically, but in the long term this is one of the best utilities in the country, and a stock dividend investors will want to buy and forget about.
NextEra's core utility business is strong
In the third quarter of 2023, NextEra Energy's biggest utility, Florida Power and Light (FPL), recorded $5.5 billion in revenue and net income of $1.18 billion. This is the core cash-generating business for the company. Other operations, like renewable energy owner NextEra Energy Resources, reported a loss of $230 million.
Utilities are steady businesses because they generate regulated returns on the assets deployed, and FPL has benefited from a growing population and growing consumption in Florida.
But the other parts of the business haven't been as steady.
Renewable energy backfires
NextEra Energy has two business units that are involved in renewable energy. NextEra Energy Resources develops and owns renewable energy assets and lives under the NextEra Energy umbrella, while NextEra Energy Partners (NEP -0.89%) is a publicly traded entity controlled by NextEra Energy.
All of the development has been affected by higher rates, lowering the potential return of developing or owning renewable energy assets long-term. NextEra Energy Partners alone needs to refinance an additional $1.5 billion in debt after raising $750 million earlier this month with a 7.25% interest rate.
Higher rates pressure margins across the industry, but these assets still hold tremendous value, and NextEra Energy Partners still expects to have a dividend yield of over 11% exiting 2023. I think the market has underestimated the company's potential, and this will prove to be a great buying opportunity for investors.
Expectations are high for NextEra
Even now, NextEra Energy's management is confident in the company's growth trajectory. They said earnings are expected to grow between 6% and 8% through at least 2026, and dividend payouts will increase around 10% through next year.
The utility business will be a driver of the foundation of growth, but renewables will play a role. The company has proven its ability to finance at attractive rates and get into new technologies earlier than other competitors.
What investors in a utility like NextEra Energy need to look at is the long-term trajectory of the business and where the next decade of returns will come from. That matters more than the next few months.
NextEra Energy has tailwinds from a rising population in Florida and growing demand for renewable energy, which is more important than a few basis points of growth here or there. That's why I think this is still a great buy-in energy, even if there are some rocky roads ahead.
