Through the close of trading Oct. 10, shares of NextEra Energy (NEE 0.37%) delivered an impressive 18% gain over the past month. This not only beat the S&P 500's 1% advance and edged out all 30 of its peers in the Utilities Select Sector SPDR Fund (XLU 0.89%) -- which itself was up 8%. The move also marked NextEra's best one-month rally since June 2024.
The leadership change within this defensive sector was also notable for several other reasons, including the fact that NextEra Energy is also the largest company in the utility sector by market cap with a $172 billion valuation that leaves it nearly 50% larger than its closest peer, Constellation Energy, which is worth about $115 billion.
Prior to this short-term run to the top of the utilities leaderboard, NextEra had been lagging the sector and the broader market, on a six-month, year-to-date, one-year, three-year, and five-year basis. Even with its recent outperformance, Koyfin data shows NextEra's 19% year-to-date gain leaves it 18th of 31 utility sector members. On a five-year basis, the underperformance is even more stark, as NextEra shares have returned just 24% in the past 60 months, ranking them 25th of 31 in the group, at a time when the utility sector rose 66% and the S&P 500 gained 90%.
Even then, much of NextEra's five-year return came from dividends, a fact that underscores the importance of the payouts, which have increased annually since 2006. Currently, NextEra shares carry a dividend yield of 2.7%, which is slightly higher than the utility sector's overall yield of 2.5%.
But is it overvalued?
Whether or not NextEra has gotten ahead of itself depends on who you ask, how you measure, and what your time frame is.
For example, on a forward price-to-earnings-ratio basis, NextEra is trading at 23.5 times estimated earnings, which is currently the sixth-highest P/E of the 31 stocks in the group.
Along that same vein, with a price-to-sales ratio of 9.1 times estimated revenue over the next 12 months, NextEra sits atop the list as the most expensive by that measure.
Image source: NextEra Energy.
There's also the issue of NextEra's debt -- $93.2 billion as of June -- and its debt-to-equity ratio of 152%. While that metric has risen 50 percentage points since December 2018, the Florida-based company currently sits in the middle of the pack (19th of 31) for the utility sector. Like all power companies, NextEra faces extremely costly capital expenditures to build, maintain, upgrade and grow its infrastructure and renewable and nuclear energy sources to keep up with demand. It is also undergoing an ongoing "grid hardening" process brought on by an increase in extreme weather events.
NextEra -- like all of its utility industry peers -- is therefore exposed to interest rate changes, which are presently declining following the Federal Reserve's recent reduction in its benchmark rate.
As for earnings, NextEra has not announced an official date yet but is expected to release its Q3 results toward the end of October. On average, analysts are looking for NextEra to earn $0.97 per share, down 5.7% from a year ago, on revenue of $8.1 billion, which reflects a 7.7% top-line gain.
Two-thirds (13 of 20) analysts who follow the stock currently rate NextEra a buy, compared to six who rate it hold and one sell. In terms of 12-month price targets, the average price forecast is $84.72, which implies only about 1% upside from current levels.
Buy the dips
Taken together, that leaves investors with a stock that is relatively pricey on a P/E basis, that pays a stable yet average dividend for the utility sector, but that is backed by a vast portfolio of clean energy assets and powerful demographic trends in its core service area. Long-term total return investors should feel comfortable holding NextEra Energy alongside Wall Street pros who favor the stock, as well as dozens of funds and exchange-traded funds (ETFs) that own it. With that in mind, new investors would be wise to wait for a pullback -- or pause -- before starting to build a new position.
