Energy companies aren't always the flashiest, but they can be great investments if you buy the right one at a solid price. NextEra Energy (NEE +0.07%) has been very lucrative for a long time. The stock has generated over 15,000% in total returns over its lifetime.
Notably, a tremendous wild card in U.S. infrastructure could impact the nation's electricity demands, creating ripe conditions for continued investments in power generation over the coming years. That could mean that NextEra remains a cash-gushing market-beater for years to come.
NextEra's formula for success
America's energy landscape is steadily shifting. Renewable energy sources like wind and solar were once a rounding error on the nation's energy grid. Today, renewable energy contributes 22% of electricity generated and 13% of total energy consumed.
NextEra Energy is one of the world's largest renewable energy companies. It owns and operates renewable energy projects and is America's largest electric utility, serving over 12 million people in the southeastern United States. It has enough capacity to generate 64 gigawatts of clean energy annually.
As a utility business, NextEra negotiates prices with regulators in exchange for investments into the utility business to upgrade and maintain the electric grid. Meanwhile, it generates and sells clean energy from its projects in almost every U.S. state. The political and commercial demand for clean energy has driven the growth that has turned NextEra into a business worth over $130 billion today.
NYSE: NEE
Key Data Points
Artificial intelligence is a catalyst for growth
Simply put, the greater the need for renewable energy, the greater the growth you'll see from NextEra. A U.S. energy grid that's spent years increasingly depending on renewable energy is a significant tailwind for long-term growth.
However, artificial intelligence (AI) is a wild card that could greatly impact demand for clean energy. AI requires massive computers housed in data centers to run its models on. These data centers suck up a lot of electricity, and the push for a reduced carbon footprint means that these data centers are often using renewable energy (frequently integrated with fossil fuels for now).
According to a study cited in a Washington Post report, forecasts for energy demand over the coming decade doubled in 2023. The culprit? Data centers, which consumed 4% of electricity in America in 2022. That figure could increase to 6% by 2026. That's a 50% increase. What will that look like by 2030? 2035?
Image source: Getty Images.
The numbers behind beating the S&P 500
I believe NextEra Energy will beat the S&P 500 moving forward. It boils down to some simple numbers.
For starters, the S&P 500 has historically returned an average of 10% annually over the long term. That's our hurdle to clear.
NextEra Energy went through a large growth spurt, with annual revenue increasing from $16 billion to $27 billion. The company has a large backlog of 21.5 gigawatts, which will increase capacity by about 33% once online.
NEE Revenue (TTM) data by YCharts
Analysts estimate that earnings will grow around 8% annually over the long term. Add in a dividend that yields 3% today, and investors could see 11% annualized returns, about 10% over the broader market's historical average.
This, of course, assumes that the valuation doesn't drop. So, how likely is that to happen?
NextEra Energy is trading well off its highs. The company often borrows to help fund these large projects, and higher interest rates always make borrowing more expensive. If you look at NextEra's price-to-book ratio, shares are near their 10-year average and well off the highs in recent years.
NEE Price to Book Value data by YCharts
Higher rates are hurting the share price, and the market was willing to pay more for the stock during its growth spurt. I don't see a broken company. Instead, I see a stock overvalued and brought down to Earth by some adversity. Shares look more attractive now that they're on par with long-term norms.
In other words, NextEra Energy seems poised to generate investment returns similar to its growth, which sets up investors for more market-beating performance in the future.
