NextEra Energy (NEE 0.24%) is defying the traditional utility company mold by combining the stability of a regulated utility company with the ambition of a renewable energy business. This dual model has become a long-term growth engine for the company.
NextEra is a defensive stock with considerable upside potential, meaning it'll remain relatively unaffected during an economic downturn but could also see significant growth under the right conditions. NextEra is a great long-term play for investors looking for more than a typical power company to round out their portfolios.
The majority of NextEra's revenue is powered by Florida Power & Light (FPL), accounting for approximately 70% of revenue. FPL provides power to more than 12 million residents, and this demand is increasing with the state's population. Florida is the third-largest and fastest-growing state in the country, with a population expected to reach nearly 27 million by 2040. Should the state continue to expand at this pace, NextEra's investors will reap the benefits.
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Expanding electricity and renewable energy demand
The remaining 30% of the utility company's revenue comes from NextEra Energy Resources, its renewable energy expansion arm. NextEra Energy Resources is already a leading electric energy infrastructure company in North America. This subsidiary of NextEra has positioned itself to take advantage of ever-increasing electricity needs throughout the country and Canada. Electricity demand is skyrocketing due to artificial intelligence (AI) data centers, electric vehicles, increased domestic manufacturing, and population growth.
As Florida's electricity demands grow, it will provide NextEra with predictable revenue and cash flow for the next several years. This steady stream of income will also fuel the significant capital required to fund renewable energy projects. NextEra owns the largest renewable energy portfolio of all U.S.-based utility companies. The company plans to invest approximately $75 billion through 2028 in projects focused on the storage, generation, and transmission of energy.
NextEra expects 6% to 8% annual growth through 2027, a solid rate for a utility company. By comparison, Duke Energy and Southern Company project slightly lower 5% to 7% growth rates. NextEra also anticipates 10% growth in its dividend through at least 2026. This stability and growth combination is a solid opportunity for investors.
NextEra's energy portfolio is diverse and includes gas, solar, wind, nuclear, and storage. The company also boasts significant in-house engineering expertise and vertical integration, which give it a cost advantage over newer and less well-capitalized competitors.
Facing policy and interest rate headwinds
NextEra's path isn't completely clear of obstacles, though, as regulatory environments change from administration to administration. Federal support for clean energy could dissipate or disappear completely. The Trump administration has already cut billions for clean energy initiatives.
State regulators could also oppose future rate hikes, cutting into the company's margins. Increasing costs in a capital-intensive business might further strengthen the headwinds against NextEra. The company is sure to keep a close eye on the Federal Reserve as high interest rates will impact its ability to borrow and, thus, negatively damage the balance sheet.
The stock itself trades at a premium, but this is mostly due to the market viewing NextEra as a growth stock rather than a basic utility company. In market downturns, NextEra is more likely to experience pricing volatility compared to traditional utility companies. However, this shouldn't scare away long-term investors.
NextEra will lead energy companies into the next decade
NextEra is a well-managed company with a long track record of paying dividends while making aggressive moves in the renewable sector. Investors should consider NextEra a long-term portfolio hedge in volatile markets. Its long-term vision is well thought out and, thus far, has been satisfactorily executed.
There's a lot to love about NextEra's ability to combine stability and long-term growth. Utility stocks are reliable and steady during tough economic times, but renewables are poised for tremendous growth over the next few decades. NextEra take advantage of both. Despite potential short-term challenges in policy and interest rates, NextEra's strong dividend -- yielding about 2.7% at the current stock price -- and solid fundamentals position it to remain a leader in the energy space.
