Published March 11th, 2017 by Bob Ciura
NextEra Energy (NEE, Financial) isn’t your run-of-the-mill utility. It has a heavy focus on renewable energy like wind, nuclear, and solar.
It generates more than $16 billion of revenue, and has nearly 46,000 megawatts of generating capacity. It has more than 14,000 employees in 30 U.S. states and Canada.
NextEra is also an uncommon stock in the utility sector, because of its high rate of dividend growth.
The company recently increased its dividend by 13%.
And, the company projects 12%-14% annual dividend growth through 2018.
Double-digit dividend increases of this nature are a rarity in the utility sector.
NextEra has now increased its dividend for 22 years in a row. It is a Dividend Achiever, a group of 271 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
This article will discuss the key factors that differentiate NextEra from the rest of the pack, and why it is a premier dividend growth stock in the utility sector.
Business Overview
NextEra has a standard utility generation business, but with an added twist. The company is comprised of two operating subsidiaries: Florida Power & Light (FPL), and NextEra Energy Resources, its clean-energy segment.
Florida Power & Light is a standard electric utility. It has 4.9 million customer accounts, and $45.5 billion of operating assets.
Source: February/March 2017 Investor Presentation, page 10
Overall, half of NextEra’s generation capacity comes from natural gas, but it also has a sizable renewables portfolio.
Source: February/March 2017 Investor Presentation, page 5
Approximately 26% of NextEra’s generation comes from nuclear energy, and another 20% is derived from wind.
The benefit of a large renewable portfolio is that, as demand grows, costs are coming down.
In addition, NextEra has one of the lowest rates of carbon dioxide emissions in the industry, which will help shield it from regulatory and environmental risk going forward.
2016 was a very strong year for the company. On an adjusted basis, full-year earnings-per-share rose 8.4%, to $6.19 per share.
This sets up the company well for continued growth up ahead.
Growth Prospects
NextEra has a demonstrated track record of steady growth.
Source: February/March 2017 Investor Presentation, page 6
For example, from 2005-2016, the company increased earnings-per-share by 8.1% each year, on average.
This led to a similar dividend growth rate in that time, and above-average total returns for the preceding one-year, three-year, five-year, and 10-year periods.
NextEra has a two-pronged approach to future growth. First, as it pertains to FPL, the company intends to focus on cost effectiveness.
Source: February/March 2017 Investor Presentation, page 12
FPL has achieved a very attractive cost structure, which helps boost profitability and earnings growth.
In the FPL segment, favorable rate outcomes will also generate growth. A benefit of being a regulated operation is that utilities enjoy steady, reliable new revenue growth from rate cases.
For example, FPL recently received a rate case settlement, which will provide $400 million in retail base revenue increases in 2017, and $211 million next year.
When it comes to the renewable segment, the focus is on growth, which will be attained largely through development of new projects.
Source: February/March 2017 Investor Presentation, page 16
NextEra Energy Resources has seen remarkable growth of its portfolio over the past 10+ years.
2016 was a record year for the company’s renewables business. Last year, NextEra Energy Resources expanded its renewables portfolio by adding approximately 2,500 megawatts of new wind and solar projects.
And, there is plenty more room for growth. The company added 3.5 gigawatts of renewable projects to its backlog over the past year.
Its current development program for 2017 and 2018 calls for as much as 5,400 megawatts of new installed capacity, comprised of wind and solar projects.
As the underlying economics of the renewable energy industry become more favorable, this could help NextEra boost earnings moving forward.
Competitive Advantages & Recession Performance
The biggest competitive advantage for NextEra is the size of its fleet, and the barriers to entry of the utility industry.
It is almost impossible for a start-up to build the massive assets that would be necessary to compete with NextEra, let alone the immense regulatory hurdles.
This provides a sizable economic ‘moat’ around NextEra’s business model, protecting it from competitive threats.
These defensive qualities allow the company to generate reliable profits each year, even when the broader U.S. economy deteriorates.
NextEra sailed through the Great Recession. Its earnings-per-share from 2007-2010 are below:
- 2007 earnings-per-share of $3.27
- 2008 earnings-per-share of $4.07
- 2009 earnings-per-share of $3.97
- 2010 earnings-per-share of $4.74
Other than a small decline in 2009, during the depths of the recession, NextEra didn’t skip a beat during the economic downturn.
Total earnings-per-share increased 45% from 2007 to 2010.
Dividends
After NextEra’s recent dividend increase, its annualized payout will rise to $3.93 per share going forward. This results in a 3% dividend yield based on its current share price.
This yield is slightly below average, when compared to NextEra’s peer group. For example, the SPDR Utilities Select Sector ETF (XLU) has an average yield of 3.2%.
However, NextEra investors will be compensated for a lower current yield, with much higher dividend growth.
As previously mentioned, the company forecasts 12%-14% dividend growth this year and next year.
Importantly, NextEra is in sound financial position. The company carries a credit rating of ‘A-‘ and ‘Baa1’ from Standard & Poor’s and Moody’s, respectively.
These are strong credit ratings, and indicate the company has a well-managed balance sheet. It does not appear to have a dangerously high level of debt, which is a positive for dividend sustainability moving forward.
NextEra’s forward annual dividend payout of $3.93 per share represents a payout ratio of 63.5%, which leaves plenty of room for future dividend increases.
Final Thoughts
Utility stocks are usually prone to low growth rates. Electricity is a very stable and saturated industry, leaving little growth potential.
That is why most utility stocks typically raise their dividends by 3%-5% each year.
But NextEra is an attractive dividend growth investment. Not only does it offer the stability of a utility, but it also offers compelling growth potential.
Investors interested in diversifying their portfolios by adding a renewable-energy growth company, should give NextEra a closer look.
Disclosure: I am not long any of the stocks mentioned in this article.
