Florida-based NextEra Energy Inc (NYSE:NEE) is one of the best performing utility stocks in the S&P 500 boasting a growing regulated energy distribution network in Florida as well as strong stake in a growing power generation and transportation business through NextEra Energy Resources. The company benefits from superior demographics in Florida, one of the fastest-growing states in the US, and its focus on green energy may allow them to sell its energy at a premium, providing additional upside for investors. In terms of financial performance, NextEra has significantly outgrown its peers, generated strong returns on invested capital, and has best-in-class dividend growth. However, its premium multiple on forward earnings of around 25x compared to peers trading between 14-20x may make it difficult to justify for some investors.
Important Details about NextEra Energy: A Premium Business With A Premium Valuation (NYSE:NEE) –
– NextEra Energy is a well-performing utility stock in the S&P 500.
– The company owns regulated energy distribution through Florida Power & Light and a stake in power generation through NextEra Energy Resources.
– NextEra benefits from the fast-growing population in Florida, providing increasing demand for electricity.
– NextEra has significantly outgrown its peers in revenue and EPS growth, generated strong returns on invested capital, and has fast dividend growth.
– The greatest risk facing NextEra is tightening financial conditions and the potential for lending and investor activity to slow.
– NextEra’s valuation is higher than its peers, making it an uncertain investment at this stage.
Keith Binns/E+ via Getty Images: The Rise of NextEra Energy in Florida
Florida is known for many things, from its sunny beaches to its world-renowned theme parks. However, NextEra Energy Inc (NYSE:NEE) has become one of the state’s greatest business stories of recent years, growing to become one of the highest-performing utility stocks of the S&P 500. This article will explore why NextEra Energy is so successful and consider where the company is heading in the future.
NextEra Energy is a unique utility company with a growing regulated energy distribution network (Florida Power & Light) and a powerful stake in the power generation and transportation business through NextEra Energy Resources (NEP). The regulated utility business model provides a steady cash flow that the company can then use for higher growth investments such as solar farms through NEP. NextEra Energy also benefits from superior demographics in the state of Florida, with the state being one of the fastest-growing in the nation due to its low taxes and warm weather that are attracting retirees and businesses.
Regulated utilities provide energy (gas and electricity) to customers at rates regulated by local government where they serve. The utility companies accept a lower price in exchange for a state-approved monopoly, thereby giving them very steady revenues in nearly all market cycles. NextEra Energy has managed to buck the trend of low growth in the industry, having grown its earnings per share (EPS) significantly to 13.7% in the full year of 2022.
One reason for the company’s success is its excellent regulated business, Florida Power & Light, which is the largest utility provider in the state of Florida, controlling almost the entire east coast of Florida and a significant portion of Southwest Florida. The author believes that the trend of more high-net-worth individuals relocating to low-tax states like Florida is likely to continue, providing a rising tide of demand for electricity from the consumers and businesses moving into the state.
Another factor is NextEra Energy Resources, with its subsidiary providing a substantial growth opportunity for the parent company through its different green energy projects. NEP invests in wind, natural gas, nuclear, solar, storage, pipeline, and transmission projects around the entire country, making it one of the top alternative energy companies in the world. These projects are often launched in tandem with a power supply arrangement where customers pay a predictable price for a set quantity of power over a long period, making financing these large projects much more feasible. Its focus on green energy may allow them to sell energy at a premium to companies and localities with a mandate to transition to green energy, providing investors with additional upside.
NextEra Energy has outgrown its peers over the last decade, with its revenues growing by roughly 48% in this time. This increase in revenue allowed NextEra to double its EPS in the same period due to its operating leverage. The company also boasts the highest returns on invested capital (ROIC) among the peer group, with 4% compared to its peers, which are closer to 3%. NextEra Energy is one of the rare exceptions that deliver on high dividend growth, having nearly tripled its payout over the last decade.
No investment is risk-free, and the greatest risk facing NextEra is the tightening financial conditions, making debt and equity more expensive to issue. If the capital markets shut down, the growth opportunities of NextEra may slow and be funded with a greater internal capital mix.
Finally, while NextEra Energy is a well-managed company with an impressive growth trajectory, its premium multiple on forward earnings compared to its peers raises concerns over how much more investors should pay for a great business over a good business. With heightened uncertainty in the market, investors may not consider the 4% earnings yield growing in the low double digits as an attractive investment at this stage.
In conclusion, NextEra Energy is a growing and well-managed utility company, benefiting from the demographics of one of the fastest-growing states in the US. The excellent regulated business and significant stake in the growing power generation and transportation business provide a steady cash flow that the company can opportunistically deploy to higher-growth investments. The company’s focus on green energy provides additional upside. However, investors need to consider the premium multiple on forward earnings compared to its peers before investing in the stock.