NextEra Energy (NYSE:NEE) stock offers investors a most unique proposition. The company at its core is built like a stable blue chip name. It’s a power utility after all, and has raised its dividend for 25 consecutive years. Surely NEE stock is the right sort of holding for retirees and other more conservative investors.
However, NextEra is one of the most dynamic and exciting utility companies you’re ever going to find. Just look at the stock chart; NEE stock is up more than 500% over the past decade. That’s jaw-dropping stock performance for a utility company. That should give you a hint of its unique edge compared to its industry.
And indeed, NextEra has built one of the largest portfolios of renewable energy assets within its industry. This puts NEE stock at just the right place at the right time.
NEE Stock Has Strong Base in Florida Utility
For average power consumers, NextEra may not be a household name. However, its leading subsidiary, Florida Power & Light, has been in business since 1925 and serves roughly 10 million people. This is a business with long-standing ties to its local market that has managed to evolve faster than the utility market as a whole.
Part of this has been thanks to forward-thinking management and a favorable regulatory environment from the Florida legislature. FPL intends to reach 10 gigawatts of solar energy capacity over the next decade, making up 20% of its baseload operations. It is receiving compensation for this investment through its rate agreements with the state.
Additionally, given all the hurricane activity in recent years, Florida is spending on toughening up its infrastructure for future storms, which has sent significant money to Florida Power & Light for needed repairs and upgrades.
Risker Renewables Offer Higher Rewards
Aside from the regulated power business, which gives NextEra a firm core business, it has also invested heavily in its renewable energy standalone operations. The company has become a leader in renewable energy generation, and can earn profits selling electricity into markets where it isn’t the regulated provider.
This is riskier than its local regulated model, but comes with higher rewards as well. And with the winds currently blowing in favor of renewable energy, NextEra should enjoy continuing momentum in coming months and years.
While renewable energy does avoid the air pollutants or discharge wastewater of traditional fossil fuel generation, wrote lawyers from the Environmental and Natural Resources Practice Group of Vinson & Elkins last month, construction of renewable projects arguably contains just as many risks as more stringently regulated assets.
Valuation is Rich, Though Not Absurd
Analysts see NextEra earning $2.50 per share over the next year. When keeping in mind recent results, don’t forget that NEE stock just split 4:1 on Oct. 26, so past dividend and EPS figures should be adjusted to reflect that split. In any case, using the post-split figures, NEE stock is trading at 30x its new earnings readout of approximately $2.50 per share.
That’s not cheap for your average company, and it’s certainly not a bargain in the traditional energy utility space. On the other hand, NextEra has proven that it has far-above-average management capability and growth opportunities compared to peers. The company has averaged 7% compounded earnings growth over the past decade. That’s fine for a typical S&P 500 index company, and it’s tremendous for a power utility. Furthermore, the company has averaged 11% annual dividend hikes in recent years, which is a standout rate.
So, while it’s hard to argue that NextEra is a stunning value at this price, it’s hardly an excessive share price either. And it’s certainly an appealing way to play the emerging renewables trend as opposed to buying some pure-play solar company at 60x earnings or an electric vehicle company that isn’t even generating revenues yet. If you want exposure to clean energy but don’t want to give up the stability of a large blue chip operation, NextEra could be the perfect compromise.
NEE Stock Verdict
NextEra was already riding a favorable wave in recent years. And now, with the Biden Administration set to take power in January, this should only accelerate. Even more money will be flowing into green energy names such as NEE stock. Unlike many speculative solar stocks or electric vehicle names, NextEra is a successful existing utility that managed to grab on to the current industry transformation in its early stages.
This makes it a highly profitable company with a strong balance sheet that has transformed itself organically. There aren’t a lot of these outside the technology sector and thus the market will pay up for NextEra accordingly. This sort of internal improvement can be easier — and it’s certainly much safer — than investing in a pioneering new business that is still starting out from virtually nothing.
NextEra is never going to have quite as stratospheric of a run as a small speculative company. However, for investors that want a dominant firm with a unique angle, a strong dividend history, and excellent posture heading into the Biden Administration, look no further than NextEra Energy.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
