NextEra Energy(NYSE: NEE) is a large and well-run utility. It looks fairly cheap, historically speaking. It is the type of company that a lot of investors will want to have in their portfolios, but it is not going to be the perfect fit for everyone. Here's why NextEra Energy is a buy -- and why some might want to pass it by.
NextEra Energy is executing well
NextEra Energy was able to grow its adjusted earnings per share at a compound annual rate of 9.8% between 2012 and 2022. In 2023, adjusted earnings per share rose 9.3%. So it's generated more than a decade of nearly 10% growth in adjusted earnings. That's a very impressive figure, particularly for a utility. Utilities are generally considered slow and steady companies that provide investors with reliable income streams. But NextEra isn't your typical utility.
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Roughly 70% of NextEra's business is made up of regulated utility assets, largely Florida Power & Light. The remainder is the company's renewable power segment. The regulated assets give NextEra a strong foundation. It basically gets a monopoly in the regions it serves in exchange for having to get its rates and investment plans approved by the government. That said, Florida has seen net migration for years, which has resulted in a steady increase in customers. The renewable power business is the company's growth platform, with around 34 gigawatts of production capacity and plans to potentially more than double that figure by 2026.
This combination is expected to boost adjusted earnings between 6% and 8% a year through at least 2026. It's also worth highlighting that NextEra has an investment-grade balance sheet, so it has a solid financial foundation to back up its robust business. As another sign of the company's fortitude, the dividend has been increased annually for nearly three decades. It is the type of boring and reliable stock that a lot of investors will like.
NextEra will not be for everyone
The problem is that investors have largely recognized the company's strong performance and solid outlook. NextEra Energy's dividend yield is 3.6%, which is just average for a utility stock, using Vanguard Utilities Index ETF(NYSEMKT: VPU) as an industry proxy. Thus, investors seeking to maximize the income they generate from their portfolios will probably not be excited by NextEra Energy.
However, that 3.6% yield is near the highest levels of the past decade. Viewed in that light, it appears that the stock is on sale right now. This is likely driven by the rise in interest rates, which will increase the company's expenses. Higher costs will be a headwind to growth.
That's not great, but management is still projecting a dividend boost of 10% in 2024. That is roughly the same rate it has achieved over the past decade. And the respectable adjusted earnings projections noted above should support continued dividend increases, though perhaps not quite in the double-digit range. Even if dividend growth slowed to the pace of adjusted earnings expansion, NextEra Energy would still be a standout dividend growth stock in the utility sector.
That is the big story here. Yes, you can buy utilities with higher yields. But finding a utility with as strong a dividend growth profile will be much harder to achieve. Growth-and-income investors and dividend growth investors will probably find NextEra Energy extremely attractive today.
NextEra is not perfect, but it is very good
There's no such thing as a perfect stock, so it is hardly surprising that there are some investors who won't see NextEra Energy's appeal. That said, given its strong business, solid balance sheet, and promising growth prospects, a lot of investors will likely find this utility quite compelling. It would fit particularly well in a growth-and-income portfolio, because it could add diversification to a portfolio that would most likely be light on utility exposure.
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Reuben Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
