The efficient markets hypothesis suggests that stock prices are rational, but anyone who invests for long enough knows that this isn't always true over short periods of time. Right now, NextEra Energy (NEE 2.45%) looks like it is being mispriced. There are reasons why Wall Street is worried, but the company's management team seems as confident as ever. Given a long history of success for the reliable dividend stock, here are three reasons why you might want to side with management and buy it.
1. NextEra has a uniquely attractive business model
About 70% of NextEra Energy's business is roughly similar to its regulated utility competitors. This division owns Florida Power & Light, one of the largest utilities in the United States, among other assets. It is an attractive business, in no small part because Florida has benefited for years from people moving to the Sunshine State for tax and weather reasons. More residents means more customers, and therefore growth.
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As far as regulated utilities go, the location of NextEra Energy's operations is favorable. That, however, has to be juxtaposed against the need to get rates and investment plans approved by regulators. So despite Florida Power & Light's many advantages, it is still only a slow-and-steady growth segment. That's where NextEra Energy Resources, the remaining 30% of the overall business, comes in. This division is one of the largest producers of solar and wind power in the world.
So 70% of the portfolio is a solid "core" business and the remaining 30% is a high-growth "explore" operation. To put a number on the explore opportunity, NextEra Energy Resources currently has around 36 gigawatts of clean energy generating capacity, which it hopes to expand by as much as 41.8 gigawatts by the end of 2026. Simply put, there's plenty of growth ahead here even though investors have soured on the shares, pushing them over 33% below their early-2022 peak.
2. NextEra Energy has a historically high yield
Calculating a dividend yield is a pretty simple math equation, simply taking the annualized dividend and dividing it by the current market price. If the dividend stays constant and the price falls, the yield goes up -- and that's exactly what has happened at NextEra Energy. It is currently yielding around 3.3%, which is near decade highs. That suggests the stock is cheap today.
There are two things to discuss here. First, why did NextEra Energy's stock price fall so much? Rising interest rates are the biggest factor and they have impacted the entire utility sector. Basically, higher rates make it more expensive for companies in capital-intensive industries to expand their businesses. That's a legitimate concern and, being one of the fastest-growing companies in the utility sector, NextEra Energy was one of the hardest-hit stocks.
Second, the 3.3% dividend yield probably isn't all that attractive on an absolute level. You can easily find higher-yielding utilities. But the combination of yield and dividend growth is what is important to understand, bringing us to reason 3.
3. 10% dividend growth through 2026!
NextEra Energy has increased its dividend annually for 29 consecutive years. Over the past decade, that average annualized boost was a huge 10.9%. That's shockingly high for a utility, but well supported by NextEra's unique two-pronged business model. As 2023 drew to a close, the company was promising that it would raise the dividend by 10% in 2024. But it didn't give a longer-term forecast on payout increases, leaving some doubt about its ability to keep hiking at that elevated rate. But in early 2024, it updated its outlook, projecting 10% dividend growth, backed by 6% to 8% earnings expansion, through at least 2026.
In other words, nothing has changed on the dividend growth front despite the interest rate headwinds. And given that the clean energy transition is likely to be a decadeslong event, there's still plenty of runway for more dividend boosts ahead.
A collection of attractive features
To sum NextEra Energy up in just a few words, it is a utility with a solid, growth-oriented business model trading at an attractive price despite having a strong outlook for the future. While investors looking for high yields might want to pass on the stock, just about any other kind of investor should find the story here very attractive.
