NextEra Energy Stock Is Well Worth the Premium

NextEra Energy (NYSE:NEE) stock has an interesting, and unusual, pair of characteristics.

Nextra Energy (NEE) website on a mobile phone screen
Source: madamF /

By market capitalization, NextEra is far and away the most valuable U.S. utility. Second- and third-place Dominion Energy (NYSE:D) and Duke Energy (NYSE:DUK) combined aren’t worth as much.

Meanwhile, relative to forward earnings, NextEra is also the most dearly valued of the electric utilities. NEE stock trades at 31x 2021 consensus earnings per share estimates. Among major utilities, WEC Energy Group (NYSE:WEC) is a distant second at 26x.

That’s an unusual combination. Microsoft (NASDAQ:MSFT), for instance, is far more valuable than, say, Zoom Video Communications (NASDAQ:ZM). But investors assign a higher multiple to the smaller company, and many others like it, given their faster projected growth rates going forward.

Obviously, utilities, and particularly regulated utilities, are very different businesses than software plays like Microsoft and Zoom. Still, it’s rare in any sector to see the market price a business as both the biggest (ie, most valuable) and the best (as the higher earnings multiple in turn reflects higher growth potential).

But the combination makes sense here, because NextEra indeed looks like the biggest and the best. That’s the core of the attractive bull case for NEE stock.

Clean Energy Growth

One of the core reasons to own NextEra is its potential in clean energy. Results of the recent presidential election have been cited as a catalyst for NEE stock, as Joe Biden ostensibly should help the push for renewable energy sources such as wind and solar.

But the broader point is that the election doesn’t really matter. The revolution already is underway and defies politics. The top four states in terms of wind power generated all went for President Donald Trump in the election, including Texas, far and away the leader. More liberal California leads in solar power, thanks in part to generous state-level subsidies. But the top 10 includes Texas (again), North Carolina, Utah, and Florida — all still Republican states.

State-level regulators are pushing renewables. Major companies are looking to minimize their “carbon footprints.” The growth in clean energy simply is not solely dependent on the White House and the U.S. Congress anymore.

And NextEra is one of the sector’s biggest players, and likely its biggest. Indeed, its NextEra Energy Resources business is the largest producer of solar and wind energy in the world.

That scale positions NextEra to profit in however the renewable revolution plays out. Whether it’s long-awaited battery storage, or better solar farms, NextEra is going to have its hand in projects around the country.

That business is going to grow — and it’s already rather large. In 2019, NEER revenue totaled $3.6 billion, more than one-quarter of NextEra’s total revenue. Adjusted earnings per share were $3.49, 40% of total profit.

The Utility Business

That clean energy business sits on top of traditional utilities that themselves look rather attractive.

Florida Power & Light serves huge and growing markets across the state. Fort Myers, for instance, by one measure is the fastest-growing city in the country. South Florida continues to boom, as does Jacksonville.

More citizens mean more FP&L customers, and more profit for NextEra. Gulf Power, acquired at the beginning of 2019, serves the area around Pensacola, which too is seeing an influx of residents.

The utility business is going to grow inorganically as well. NextEra clearly is on the hunt for more acquisitions. It has made offers to acquire Duke Energy and Evergy (NYSE:EVRG). At least two other deals were rejected by state regulators.

And what’s helpful so far is that the company hasn’t pushed too far, or been willing to pay too high a price, simply to get a deal done. NextEra chief executive officer James Robo has said publicly that his company won’t pursue a hostile acquisition. At some point, NextEra will find a willing target and get a major deal done. Its history so far suggests that the deal will be a likely winner.

NEE Stock Looking Forward and Backward

Over the past two decades, NEE stock has been the best stock in the sector. As a recent NextEra presentation (see slide 6) points out, on June 30, 2001 NextEra was the 30th-most valuable utility globally. Again, it’s now number one by an enormous margin.

Over that stretch, total returns have averaged nearly 16% annually. That’s a massive performance in a sector usually chosen for income and its defensive nature. Lower risk almost always means lower reward, but not for NextEra stock.

Admittedly, the market to at least some extent is pricing in that history. Again, relative to earnings, NEE stock is the most expensive utility stock out there. A 1.8% dividend yield is paltry by the standards of the sector.

But no other utility has the growth potential promised by NextEra Energy Resources. No other utility has the track record that inspires such confidence in management.

NextEra is worth paying a premium for. This is not just one of the best businesses in the sector, but one of the best businesses in the market. NEE stock isn’t cheap because NEE stock shouldn’t be. It’s still easily worth owning anyway.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for and other outlets. 

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