Updated on January 29th, 2023 by Jonathan Weber
Every year, Sure Dividend reviews the Dividend Aristocrats, which we consider to be some of the best investments for investors seeking to build long-term wealth.
Companies who have attained Dividend Aristocrat status have met the following criteria:
- Are a member of the S&P 500 index.
- Have at least 25 consecutive years of dividend increases.
- Meet certain size and liquidity requirements.
Membership in this group is very exclusive, as there are just 68 stocks on the Dividend Aristocrats list.
We have compiled a list of all 68 Dividend Aristocrats, along with important financial metrics such as price-to-earnings ratios and dividend yields. You can download the full list by clicking on the link below:
NextEra Energy, Inc. (NEE) is a Dividend Aristocrat since 2021 when it managed to hit the 25-year dividend growth goal. It has since continued to increase its dividend.
This article will discuss NextEra Energy’s business model, growth prospects, and valuation to determine whether it is an attractive stock for income investors right now.
With a market capitalization of ~$150 billion, NextEra Energy has grown into one of the largest utility companies in the world since its founding in 1925.
While the company has nuclear power plants in Iowa, New Hampshire, and Wisconsin, it is in Florida where it has the vast majority of its business. The company consists of three operating segments: Florida Power & Light, NextEra Energy Resources, and Gulf Power. The Florida Power & Light and Gulf Power segments are rate-regulated electric utilities that serve more than 5.6 million customer accounts in Florida.
NextEra Energy also owns 83% of NextEra Energy Partners LP (NEP), a Master Limited Partnership that acquires, owns, and operates contracted clean energy projects.
You can see NEP featured in our top MLP list here.
NextEra Energy is one of the largest generators of wind and solar energy in the world.
The company receives around two-thirds of adjusted earnings from its electric utility business, with the renewable energy business providing the remainder. On October 28, 2022, the company reported earnings results for the period ending September 30, 2022.
Source: Investor Presentation
For the quarter, revenue totaled $6.7 billion, which allowed the company to generate a net profit of $1.68 billion on an adjusted basis, where one-time items affecting the comparison are backed out. Earnings-per-share came in at $0.85, which made for a compelling 13% increase year over year.
NextEra has proven very successful at growing earnings-per-share over the long term. Over the last decade, adjusted earnings-per-share have increased with a compound annual growth rate of 7%.
NextEra Energy benefits from several key factors that should enable the company to continue to grow. Its utility business is well-positioned to capture new customers as it resides in one of the largest states in the country. Florida’s population also continues to grow, which should provide the company with the potential to increase its customer count, which should benefit its revenue growth in the future.
NextEra is also located in a state that is very constructive in its regulation of utilities. This allows the company to recover its investments in new projects quickly. For example, Florida Power & Light, along with Gulf Power, notified regulators that it would seek annual base rate increases of more than $600 million in 2023, with further base rate increases being seen in 2024 and beyond. The company’s enormous customer base allows it to make massive investments without resulting in extremely high base rate increases.
But what really sets NextEra Energy apart from most of its peers is the company’s renewable energy business. This business is growing at a much faster pace than the company’s other segments.
NextEra Energy Resources added more than 2,300 megawatts to its backlog in the third quarter of 2022, which made its total backlog grow to an impressive ~20,000 MW. The company will bring a large portion of that online over the next two to three years, and investors can expect further massive investments in renewable energy assets in the long run. Demand for clean energy continues to grow. As the largest name in this industry, it is likely that NextEra Energy will be able to take advantage of this over time.
It is thus not surprising to see that the company is forecasting substantial earnings-per-share growth in the long run:
Source: Investor Presentation
In the 2022 to 2025 time frame, earnings-per-share are forecasted to grow by 8% per year, while NextEra Energy forecasts that the earnings-per-share growth rate will decline slightly to around 7% in the long run. As that is in line with NextEra Energy’s historic growth, we believe that 7%-8% annual earnings-per-share growth is realistic over the next five years.
Competitive Advantages & Recession Performance
Size and scale are NextEra’s biggest competitive advantages. No other company in the world can claim a larger renewable energy business than NextEra. A very large (and growing) customer base is an additional advantage.
The company regularly expands its massive scale via acquisitions, such as its 2019 purchase of Gulf Power, from Southern Company, for $6.5 billion. These acquisitions usually are immediately accretive for NextEra’s earnings-per-share, which creates significant value for shareholders, especially when additional synergies are captured over time.
Utility stocks are often viewed as reliable investments given the steadiness of their revenues and earnings. This makes these stocks especially attractive to investors in uncertain times.
NextEra Energy is no different and performed very well during the last recession. Listed below are the company’s earnings-per-share before, during, and after the last recession:
- 2006 earnings-per-share: $0.81
- 2007 earnings-per-share: $0.82 (1.2% increase)
- 2008 earnings-per-share: $1.02 (24.4% increase)
- 2009 earnings-per-share: $0.99 (2.9% decrease)
- 2010 earnings-per-share: $1.19 (20.2% increase)
NextEra Energy did suffer a slight drop in earnings-per-share in 2009, but overall, saw its bottom line grow quite a lot in the 2006-2010 time frame.
At the same time, the company’s dividend continued to grow. Listed below are NextEra Energy’s dividend-per-share for the same period:
- 2006 dividends-per-share: $0.38
- 2007 dividends-per-share: $0.41 (7.9% increase)
- 2008 dividends-per-share: $0.45 (9.8% increase)
- 2009 dividends-per-share: $0.47 (4.4% increase)
- 2010 dividends-per-share: $0.50 (6.4% increase)
Dividend growth did slow in 2009 compared to the prior years but ramped up the very next year. NextEra’s dividend has compounded at a rate of around 10% over the last decade. Shares currently yield 2.3%.
Valuation & Expected Returns
Based on expected adjusted earnings-per-share, the stock has a price-to-earnings ratio of 24.3 at current prices. NextEra Energy’s long-term average earnings multiple is lower than that, but the multiple has expanded to more than 24 times earnings over the last couple of years.
We feel that a five-year target multiple of 24 times earnings would be fair, as this is represents a premium to most peers in the sector and as this accounts for NextEra’s leadership position in renewable energy.
Our target multiple implies that multiple compression will be a very minor headwind to total returns going forward. Shareholders could see valuation reduce expected total returns by 0.2% per year through 2028 if the stock were to trade with our target price-to-earnings ratio at that point.
Fortunately, earnings growth and dividend yield will also contribute to total returns. We believe that the company’s extensive renewable portfolio, in addition to its growth prospects and competitive advantages, will allow NextEra to grow at a rate of 7.5% per year over the next five years.
Annual returns will consist of the following:
- 7.5% earnings-per-share growth
- 2.3% dividend yield
- -0.2% multiple reversion
In total, we expect that NextEra Energy will offer an annual return of 9.6% over the coming five years, which is attractive.
There are a high number of positives that investors should find in NextEra Energy. The company’s size, ability to thrive in recessionary times, and its dividend history are just three items we find attractive about the company.
NextEra Energy is also located in a state that we believe to be very constructive for approving rate base increases. Florida’s population also continues to grow, which should provide additional customers.
The company also is adept at making solid additions to its core business through acquisitions. We expect that this will also be the case in future years as NextEra augments its organic growth with strategic additions.
Lastly, NextEra’s leadership position in the renewable energy space cannot be overstated. The company has a very large backlog that should provide for ample growth in the coming years.
Forecasted total returns in the high single digits are compelling, but not quite high enough for a Buy rating yet, which is why we rate NextEra Energy a Hold at current prices.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: