NextEra Energy (NEE) is one of the leading electric power and energy infrastructure companies in North America, and a major player in the renewable energy space. NextEra’s operations are split between two principal businesses, FPL and NEER.
FPL is the most extensive electric utility in Florida and, consequently, one of the country’s largest electric utilities. FPL invests in the generation, transmission, and distribution infrastructure needed to achieve affordable customer bills, grow reliability, and produce clean energy for more than 12 million people.
NEER is the largest generator of renewable energy from the wind and sun around the globe. NEER is also one of the leading companies in battery storage. NEER’s assets throughout the U.S. and Canada usually operate under long-term contracts.
NextEra is highly regarded amongst investors as a result of its phenomenal value creation spree over the past decade that resembled nothing of the expected performance that utilities usually deliver. In fact, following NextEra’s extended rally since 2008, the company is currently valued at around $157.6 billion, which makes it the highest-valued utility in the country. For context, the second-most valuable utility in the U.S., Duke Energy (DUK), is valued at “only” $82.3 billion – around half that of NextEra.
Due to NextEra being a trustworthy company whose operating nature results in relatively predictable cash flows, the company has overperformed the market during the ongoing, highly uncertain environment. Particularly, shares have gained 7.0% over the past year. In comparison, the S&P 500 (SPX) has declined by 10.7%. While investors’ migration from riskier assets towards NextEra is quite appropriate in the current environment, the result is that the company’s valuation multiple has likely run ahead of its underlying financials.
Therefore, I am neutral on the stock.
On TipRanks, NEE scores a 10 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.
Latest Financials & Growth Estimates
NextEra Energy’s Q1 results came in rather strong, with adjusted earnings landing at $1.46 billion, or $0.74 per share, compared to $1.33 billion, or $0.67 per share, in the prior-year period.
Results were driven primarily by continuous investments, resulting in FPL seeing nearly 13% year-over-year net income growth. For instance, during the quarter, FPL commissioned roughly 450MW of new solar capacity, resulting in its solar portfolio reaching more than 3,600MW – the largest solar portfolio of any utility in the country. NEER also added about 1,770 net MW of renewables and storage to its backlog (~1,200 MW of wind, ~440 MW of solar, and ~130 MW of storage), which should also be proven accretive to future results.
NextEra’s future earnings estimates appear to be quite promising as well. Here’s the breakdown:
- For fiscal 2022 the company expects adjusted EPS to be in the range of $2.75 to $2.85.
- From 2023 through 2025, the company expects to grow adjusted EPS by between 6% and 8% per-year off of the expected 2022 estimate. This translates to adjusted EPS ranges of 2.93 to $3.08, $3.13 to $3.33, and $3.35 to $3.60, respectively.
Due to NextEra’s earnings growth being determined by predictable average annual growth in regulatory capital employed, investors enjoy great adjusted EPS growth visibility ahead, as evident by management’s medium-term guidance.
The Dividend
As a result of its solid earnings growth visibility, NextEra has managed to increase its dividend quite rapidly as well. The company now numbers 27 years of successive annual dividend hikes, featuring a 10-year dividend per share CAGR close to 10.8%.
Double-digit dividend growth has been sustained consistently since 2008. This was the case with the latest dividend per share hike back in February, which equaled 10.4%. In my view, NextEra’s dividend growth track record highlights management’s commitment to shareholder returns.
Based on the midpoint of management’s fiscal 2022 adjusted EPS outlook and the present DPS run-rate of $1.70, the company’s payout ratio stands at a comfortable 60.7%. Therefore, the company is likely to maintain DPS growth at a double-digit rate for the next few years without its payout ratio approaching worrying levels.
Wall Street’s Take
Turning to Wall Street, NextEra Energy has a Moderate Buy consensus rating based on 10 Buys and four Holds assigned in the past three months. At $90.93, the average NextEra price target implies 13.31% upside potential.
Valuation & Takeaway
Due to investors willing to pay a premium for NextEra’s earnings growth visibility and prevalent qualities, the stock’s valuation has expanded to somewhat uncomfortable levels.
Again, by utilizing the midpoint of management’s adjusted EPS guidance, we see that shares are currently trading at a forward P/E of 28.7, which is unreasonably rich for the industry. In fact, the company’s next-twelve-month P/E has been gradually expanding from the low teens in 2011 to 33.4 currently. From another standpoint, NextEra’s price/book ratio has expanded from around 1.6 in 2011 to a rich 4.4 as of today.
Thus, despite the company’s double-digit dividend increases, the stock’s yield has been on a declining trend for years, as a result of the persistent valuation multiple expansion. Thus, at just around 2.1%, NextEra’s yield is presently at the very low end of its historical spectrum.
Overall, NextEra’s investment case, while attached to multiple qualities, provides no margin of safety against a valuation compression towards the industry’s average. Consequently, investors should be wary before allocating capital to the stock.
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