Income investors often purchase shares of utility companies because they are seen as steady growers that offer dividends. Many who invest in this sector are content with lower growth as they own the names in this sector primarily for the income they provide.
There are utility companies that can provide higher growth rates while paying dividends. NextEra Energy Inc. (NEE, Financial) might be the best example of this.
NextEra Energy, a stock I continue to view as a safe port in a storm market, is regulated utility company with 5.5 million customers in Florida. It is also the global leader in renewable energy as it generates more wind and solar energy than any other company in the world.
The company reported first-quarter earnings results on April 22. Adjusted net income increased 10.4% to $1.17 billion. As a result of a higher share count, adjusted earnings per share of $2.38 was an 8.2% increase from the previous year. Results were 14 cents better than the average estimate. Revenue increased 13.2% to $4.6 billion, though this was $264 million lower than anticipated. The company also mentioned that Covid-19 hasn’t had any effect on planned construction projects, meaning that NextEra Energy’s business hasn’t been impacted by the ongoing pandemic.
Both the regulated and renewable energy portions of the company performed well during the quarter.
Net income for the Florida Power & Light Company, the largest rate-regulated electric utility in the U.S. based on retail electricity produced and sold, grew more than 9%. New investments added 10 cents to the overall earnings per share total. This segment of the company saw its average number of customers increase by 72,000 compared to the previous year. Just as important given the backdrop, Gulf Power, which NextEra purchased from Southern Company (SO, Financial) in early 2019, grew net income 8% during the quarter. The rate-regulated electric utility has 470,000 customers in northwest Florida.
Florida Power & Light and Gulf Power are separate entities within the company, but that is likely to change. The regulated portions of NextEra Energy recently filed a 10-year site plan that includes the combining of the two companies into an integrated electric system beginning in 2022. The plan projects that zero-emission electricity generation will increase by 70% by the end of the current decade compared to 2019 levels.
Florida Power & Light entered into service its first SolarTogether projects at the end of January, with 450 megawatts now in service. SolarTogether is the largest community solar program in the U.S. The company expects another 450 megawatts of SolarTogether sites to be placed in service by the end of 2020. Aside from this program, another 300 megawatts of solar are also expected to be placed into service this year.
Florida Power & Light is expected to have more than 10,000 megawatts of solar capacity installed by 2029, 1,500 megawatts of which are expected to be built under the SolarTogether program. This program launched in March and has already seen more demand from residential customers for solar installation in a single week than was installed in the previous decade.
NextEra Energy Resources, the largest generator of wind and solar energy in the world, had adjusted net income growth of 13.3%. This segment contributed slightly less than half of adjusted earnings per share during the quarter. New investments added 8 cents per share while existing generation assets contributed 9 cents to results.
While quarter growth was robust, this segment has the potential for much more in the coming years.
Source: NextEra Energy’s first-quarter earnings presentation, slide X.
The company added nearly 1,600 megawatts of wind, solar and battery storage to its backlog during the first quarter. NextEra now has a total backlog of more than 8,000 megawatts. NextEra Energy has guided towards as much as 18,500 megawatts of renewable energy contracts by 2022. For comparison purposes, NextEra Energy’s entire backlog was just under 4,000 megawatts at the end of 2015. The company’s backlog has doubled in less than five years and is expected to double again in just two more years. NextEra Energy also eyes $1 billion of investments in battery storage by 2021, which is likely the largest investment in this area by any energy company in the world.
These investments will payoff in the coming years. At a time when many companies are pulling guidance due to lack of visibility in the short term, NextEra Energy projects to produce at least mid-single-digit earnings growth over the next several years.
Source: NextEra Energy’s first-quarter earnings presentation, slide 16.
NextEra Energy expects to grow earnings per share by 6% to 8% off of 2018 results through 2021. Acquisitions will add 15 cents to 2020 earnings results and 20 cents to 2021 results. Earnings per share are then expected to grow by at least 6% from 2021 results.
For the current year, NextEra Energy has guided earnings per share in a range of $8.70 to $9.20. This is slightly below consensus estimates of $9.07.
Aside from solid earnings growth, NextEra Energy plans to aggressively raise its dividend as well. The company increased its dividend 12% for the payment made in mid-March, which is above the 10-year compound annual growth rate of 9.6%. The most recent increase was the highest increase of all utility companies with at least five years of dividend growth. This also marks the 26th consecutive years of dividend growth for NextEra Energy.
NextEra Energy forecasts dividend growth of approximately 10% through 2022 as well. Dividend growth beyond this point appears likely given the company’s payout ratio. The annualized dividend of $5.60 would consume 63% of the midpoint of expected earnings per share for the year. Its not unusual for utility companies to have payout ratios in the 80% or higher range, so NextEra Energy’s earnings payout ratio is quite healthy.
The stock yields just 2.3% today, which is slightly above the average yield for the S&P 500. NextEra Energy may not offer the yield that other’s in the utility sector offer, but that is due in large part to the price appreciation over the past several years.
Shares of NextEra Energy are essentially flat year to date, but have returned more than 27% over the last year. Both returns have beaten the S&P 500 over the respective time periods. Going back even further, NextEra Energy has seen its share price increase nearly 133% over the last five years, significantly higher than the 34% return for the S&P 500. NextEra Energy isn’t just an income only utility, it’s a growth company as well.
With this type of share price growth comes an elevated valuation. Using the current share price of $244 and the midpoint for expected earnings per share of $8.95 for the year, the stock has a forward price-earnings ratio of 27.3. This is higher than the five-year average valuation of 21.8 times earnings. Shares aren’t cheap, but NextEra Energy’s business is performing at a higher level than a lot of utility companies. That type of quality doesn’t come cheap.
In conclusion, NextEra Energy had a strong first quarter on both the top and bottom lines. The company’s investments in its business continues to add to earnings. NextEra Energy is the largest generator of renewable energy in the world and its impressive backlog is expected to grow at a high rate over the next several years. The company also has an impressive dividend growth streak and recently offered a higher than average raise. Even with an expensive valuation, NextEra Energy remains my favorite name in the utility sector. I’d prefer a pullback in the stock, but I am happy to add at the current price because of NextEra Energy’s potential in the coming years.
Disclosure: The author is long NextEra Energy and Southern Co.
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