NextEra Energy (NEE 4.42%) currently clocks in as the largest utility stock by market cap, according to a new research report by The Motley Fool. At over $150 billion, the Florida-focused utility is more than $30 billion larger than its next biggest peer.
Despite its already massive size, the utility giant could still double in value in the coming years. Here's what powers that view.
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A powerful track record
NextEra Energy has grown to become the largest utility by market cap by capitalizing on a couple of notable catalysts. Florida Power & Light (FPL), its electric utility operation in Florida, has benefited from the state's growing population and abundant sunshine. FPL has invested heavily in building additional electricity-generating capacity to support Florida's growing population. It now serves over 6 million customers, making FPL the largest electric utility in the country. FPL has also capitalized on the state's abundant sunshine to build the country's largest utility-owned solar energy portfolio. These investments have grown its operations while keeping costs low.
Meanwhile, its NextEra Energy Resources segment has capitalized on surging demand for clean power from other utilities and large corporate customers to build a leading renewable-energy business. The platform has about 38 gigawatts (GW) of power generation and storage assets. It also owns electricity transmission lines and natural gas pipelines. Those assets make it one of the largest energy infrastructure companies in North America.
These investments have helped power an 8.3% compound annual adjusted earnings-per-share growth rate since 2007. This robust earnings growth has supported nearly 10% compound annual dividend growth during that period. Together, dividend income and earnings growth have enabled the company to provide powerful total returns of 8.9% annually over the past 20 years. That's more than double the 3.6% return of its peers. Investors who held NextEra Energy shares saw their money double about every eight years at that rate.
Powerful growth ahead
NextEra Energy could double its investors' money again, potentially at an even faster pace in the coming years. The company's current plan calls for a staggering $120 billion investment in America's energy infrastructure over the next four years, making it the No. 1 energy infrastructure investor. These investments will generate predictable returns backed by government-regulated rate structures and long-term contracts that ensure stability and security. Based on this investment level, NextEra Energy anticipates growing its adjusted earnings per share at or near the top end of its 6% to 8% annual target range through at least 2027. The company also expects to deliver around 10% annual dividend growth through at least next year.
Currently, the company's dividend yields about 3%. Add that to an expected earnings growth rate of around 8% annually, and NextEra Energy could deliver an 11% average annual total return over the next several years, assuming no valuation expansion or contraction. At this rate of return, investors could see their money double in as little as six and a half years.
This projection also relies on the company's ability to maintain earnings growth near the top end of its 6% to 8% annual target range beyond 2027. Such a forecast appears reasonable, considering the expected surge in U.S. power demand. U.S. electricity demand is expected to increase 55% by 2040, powered by data centers, the electrification of transportation, the onshoring of manufacturing, and other catalysts. Analysts estimate that the country will need to add a staggering 450 GW of new power-generating capacity by 2030 alone to support this demand surge.
Given renewable energy's cost advantages and deployment speed, it will probably supply most of this incremental demand. That outlook favors NextEra Energy, a leader in developing renewables. The company should secure a significant share of new capacity projects. When combined with FPL's continued growth, driven by Florida's expanding population and increasing solar installations, NextEra Energy could continue to deliver above-average earnings growth for years to come.
The biggest utility stock will only get bigger
NextEra Energy's substantial investments in renewable energy have enabled it to become the largest utility stock by market cap. It's in a strong position to double in size in the coming years as it capitalizes on surging power demand. The company's high-powered total return potential makes it one of the top utility stocks to buy and hold for the long term.
