NextEra Energy (NEE) is one of the biggest electric power and energy infrastructure companies in North America, and an industry leader in renewable energy globally.
The company runs two principal businesses, FPL, which includes Gulf Power, and NEER.
NEER is the world’s most extended generator of wind and solar energy, as well as a global leader in battery storage. NEER operates through long-term contracted assets all over the U.S. and Canada, fundamentally consisting of clean energy solutions, providing NextEra with stable and reliable cash flows.
NextEra has been one of the best-performing stocks in the utility industry over the past decade. Amid the stock’s prolonged rally, the company is valued at around $177 billion, making it the country’s most valued utility. For context, the second-most valuable utility Duke Energy (DUK), is valued at “only” $78 billion.
While NextEra is a reliable company and is likely to continue rewarding its shareholders graciously going forward, I believe that the stock’s valuation has expanded substantially, reducing current investors’ margin of safety and potentially limiting future total returns.
Hence, I am neutral on the stock despite the company’s qualities. (See Analysts’ Top Stocks on TipRanks)
Q3 Results: A strong Quarter
NextEra Energy’s Q3 results came in rather strong. Revenues came in at $4.4 billion, declining by 8.8% year-over-year. Due to the nature of its business, revenue growth is not necessary for NextEra’s results to be charming. Profitability and future contract backlog are much more important.
Nextera’s adjusted earnings increased 13% to $1.48 billion. Adjusted EPS also increased by 12% to $0.75 due to the additional shares issued by the company.
Earnings growth was mostly powered by NextEra’s continuous investments. Specifically, its new investments comprised 8% of FPL’s EPS extension. NEER’s growth was also powered by new investment contributions, while the company added ~2,160 MW of renewables and storage projects to its backlog, equaling ~18,100 MW of total contracts signed.
Management kept its FY2021 outlook stable, expecting EPS to land at $2.40 to $2.54.
Dividend, Valuation
Most utility companies pay substantial dividends due to the predictability of their cash flows.
Combined with its robust growth, NextEra has been able to grow its dividend rather rapidly too. The company’s 10-year CAGR stands at 10.84%, with DPS growth actually accelerating over the past few years.
NextEra’s dividend growth track record numbers 25 consecutive annual hikes, which speaks volumes regarding the company’s commitment to shareholder returns. The payout ratio also stands at 60.7%, which, combined with NextEra’s robust profitability growth, should be able to sustain additional strong dividend hikes going forward.
Based on management’s outlook, the stock is trading a P/E of around 36.5 at its current levels. While NextEra’s growth is rather impressive, this multiple is hard to justify. Moreover, with a yield of just 1.74% following the stock’s prolonged rally, current investors enjoy weak capital returns to compensate against a potential valuation multiple squeezing.
Wall Street’s Take
Turning to Wall Street, NextEra Energy has a Moderate Buy consensus rating, based on three Buys and two Holds assigned in the past three months. At $92.40, the average NextEra price target implies 2.5% upside potential, nonetheless.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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