NextEra Energy (NEE -1.36%) isn't your average utility stock. Most utilities tend to be slower-growing companies known more for paying higher-yielding dividends. As a result, many struggle to beat the S&P 500. However, while NextEra does pay an above-average dividend (currently yielding 3.4% compared to the S&P 500's 1.3%), it has a proven ability to deliver market-beating total returns. Over the last decade, the utility has produced a 13.1% average annualized total return, outpacing the S&P 500's 12.9% total return.
NextEra should have the power to continue outperforming the S&P 500 in the future. Here's why.
A cash-gushing machine
Like most utilities, NextEra Energy generates lots of stable cash flow. In 2023, it produced $11.3 billion in net cash provided by operating activities. It used $3.7 billion of that cash to pay dividends to shareholders. That gave the company a relatively low dividend payout ratio (59% of its adjusted earnings, well below the peer group average of 65%).
NextEra Energy retained the rest of its steady cash flow to help fund new investments to grow its electric utility in Florida (FPL) and Energy Resources platform. It invested $9.4 billion at FPL, including placing 1.2 gigawatts (GW) of cost-effective solar projects into service and starting up a 25-megawatt hydrogen pilot project at its Okeechobee Clean Energy Center. Meanwhile, it invested roughly $15.7 billion to expand the Energy Resources business, primarily to build new renewable energy capacity. The company funded the shortfall with asset sales and its strong balance sheet.
These investments helped lift its adjusted earnings by 9.3% per share last year. That earnings expansion supported a 10% increase in the company's dividend. NextEra Energy has boosted its adjusted earnings at a 10% compound annual rate over the last decade while delivering 11% compound annual dividend growth. That rapid earnings and dividend growth have helped power its market-beating returns.
The fuel to continue beating the S&P 500
NextEra Energy Partners expects to use its strong cash flow to continue increasing its dividend and invest in expanding its infrastructure. It's investing $85 billion to $95 billion through 2025 in infrastructure projects. FPL expects to add 4.8 GW of solar capacity over the next few years. Meanwhile, its Energy Resources segment has secured over 20 GW of wind, solar, and energy storage projects. It's also investing money to modernize FPL and build energy transmission lines in Energy Resources.
These investments should boost its earnings by 6% to 8% annually through at least 2026, with the expectation that growth will be toward the upper end of that range. Operating cash flow should expand at or above the top end of that range. That should give NextEra Energy the power to increase its dividend by 10% annually through at least 2026. Add in its higher-yielding dividend, and the company's rising earnings should give it the fuel to produce total returns of at least 9% to 11% annually over the next few years.
Meanwhile, its longer-term growth outlook remains equally compelling. According to multiple forecasts, renewable energy demand in the U.S. will grow at a 13% compound annual rate through 2030. That suggests the country will build more capacity over the next several years (375 GW-450 GW) than it did over the past three decades (235 GW). Given the massive amount of renewable energy capacity needed to decarbonize the U.S. economy, there's still plenty of growth potential beyond that time frame. As a leader in the industry, NextEra should keep capturing opportunities to invest in the sector. That should enable it to expand its earnings at an above-average rate, supporting continued dividend growth.
A powerful wealth creator
NextEra Energy's utility and renewable energy operations generate lots of cash, which it uses to pay dividends and invest in expanding its businesses. Those growth-related investments should increase its cash flow in the future, giving it more money to pay dividends. That growing earnings and income should give it the power to continue producing market-beating total returns.
