NextEra Energy (NYSE: NEE) is a tomato. Cooks can't decide whether tomatoes are vegetables or fruits, and investors can't decide whether NextEra's a dividend play or a growth stock. But, the true connoisseur doesn't care. If NextEra looks good, he takes a bite. Let's test the taste of this utility to see whether it might mix with your portfolio for delicious returns.
The first thing to know about NextEra is that it's not your normal utility company. Comprised of two separate businesses, this corporation is split into both a utility provider and a wholesale energy generator. Florida Power and Light (FPL) illumines the homes of nine million Sunshine State residents. Since FPL's rates are regulated by the government, FPL's earnings are steady and increase in relation to its customer base.
NextEra Energy Resources (NEER) is the unregulated older brother that enjoys a bit more freedom than FPL. It's a wholesale electricity generator, and sells its 16,600 watts to utilities across 22 states and three Canadian provinces, according to its most recent 10-K report.
Combined, these two divisions make NextEra the largest renewable energy producer in the United States.
NextEra enjoys a fair amount of diversity due to its regulated and unregulated divisions, but the real risk reduction secret sauce of this company lies in its energy sources. Both FPL and NEER are known for their clean and/or renewable energy sources, including wind, hydro, and a bit of solar to boot.
FPL focuses less on renewable and more on clean energy, with natural gas comprising 65% of the company's electricity generation in 2011. Nuclear made up 20%, with coal and oil amounting for only 6% of total energy produced.
NEER has embraced renewable resources, and produced 35% of its electricity from wind in 2011. In its most recent 10-Q, NextEra predicts that wind and solar capital expenditures will each account for more than 30% of total capex for the next four years.
You say tomato, I say... tomato
As one of the largest electricity companies around, NextEra occupies an interesting spot at the nexus of income and growth. For income investors, its 3.5% annual dividend yield is nothing to yawn at. Plus, the company has consistently managed to increase its dividend at a higher rate than inflation. In my fellow Foolish writer Nicole Seghetti's "Investor's Guide to Utilities," she finds the following results for NextEra and other utilities:
Dividend: 5-Year-Growth Rate
|PPL (NYSE: PPL)||5.0%||4%||48%|
|Public Service Enterprise Group (NYSE: PEG)||4.5%||3%||53%|
|Aqua America (NYSE: WTR)||2.7%||7%||59%|
Source: The Motley Fool
But, unlike other utilities listed above, NextEra Energy has untapped growth potential that could offer lucrative returns over the next few years. Generally, the only way that utilities significantly grow revenue is by increasing their customer base. NextEra is geographically poised to do just that, but it can also cut costs by sourcing cheaper energies.
For now, wind and solar are only cost-effective due to government subsidies, but NextEra's current investment in these renewables will put it ahead of its competition as traditional sources like coal and oil phase out.
Although solar currently comprises just 1% of its generation capacity, NextEra recently partnered with General Electric (NYSE: GE) to acquire a 550-megawatt solar farm in California, increasing its solar capacity by approximately 85%. NextEra already has the capabilities to seriously ramp up its wind energy generation, and can phase natural gas in or out depending on price fluctuation and policy changes.
Source: NextEra 10-K
Foolish bottom line
I'm a long-term investor, and I admire NextEra's vision. As a dividend investor, I can enjoy a decent dividend while hoping for upside growth potential. As a growth investor, NextEra's dividend offers income today for big rewards tomorrow. I'm making an "outperform" call on my Motley Fool Caps page, and am looking forward to seeing where this corporation heads in the next few years.