Utilities in the U.S. have never been under more pressure than they are today. Renewable energy is now available to homeowners, threatening the monopoly utility model, and old sources of generation like coal and nuclear are under threat from regulation.
With that dynamic in mind, what could drive a utility like NextEra Energy (NYSE:NEE) higher in 2016? Here are a few factors that could help the stock.
Florida energy demand rises
The best way for a utility to grow revenue and earnings is to see its customer demand base grow with each customer using more energy. Growth in consumption requires more investment in generating capacity, transmission, and distribution, which utilities can rate base.
The good news for NextEra Energy is that Florida Power & Light customer demand is growing rapidly. In 2015, demand was up 5.6% as both customer base and consumption grew. If those trends continue in 2016, the stock could very well rise.
Renewable rates of return rise
NextEra Energy has transitioned most of its new-generation attention to renewable energy, where there's lower risk, and predictable rates of return. At the same time, there's been a major dislocation in renewable energy yieldcos, like NextEra Energy Partners (NYSE:NEP). Yields have risen, which has made buying new renewable energy projects with low rates of return difficult.
This could lower prices of renewable energy projects for the remaining buyers, raising rates of return. NextEra Energy and NextEra Energy Partners are both big buyers of renewable energy projects, and they could benefit as a result.
As yieldcos have fallen apart during the past six months, NextEra Energy Partners has held up better than most. The stock is down nearly 50% from its 52-week high, but its dividend yield is below 5%, making issuing new shares for growth an option. That's not something most yieldcos could say.
There are a couple of drivers of NextEra Energy Partners' potential rise. The first would be a big recovery in yieldcos, in general. This could be driven by rising oil prices, falling MLP yields, or even a more bullish market sentiment on renewable energy.
The other potential driver is faster-than-expected growth in expected dividends. These payouts are anticipated to be $1.38 to $1.41 annually by the end of the year. If the dividend grows more than expected, and/or management increases the distribution for 2017 to greater than 15% growth, the stock could bounce, and that could drive NextEra Energy higher.
A utility making the right moves
The reality for utilities today is that the regulated business is relatively safe, although it's still under pressure from new options like rooftop solar. The real real threat is round in the wholesale business. The steady returns are now in large renewable-energy projects that come with long-term contracts and very predictable cash flows.
NextEra Energy, through both its unregulated arm and its yieldco, has done a great job making the transition to this new energy reality. I think the strategic moves being made are very well thought out, and if market conditions move right for the company, the stock could pop.