Updated Jan 29, 2023 by Jonathan Weber
Every year Sure Dividend reviews Dividend Aristocrats. This is considered one of the best investments for investors looking to build long term wealth.
Companies that have achieved Dividend Aristocrat status meet the following criteria:
- It is a member of the S&P 500 Index.
- It has increased its dividend for at least 25 years in a row.
- Meet specific scale and liquidity requirements.
Membership in this group is very exclusive as there are only 68 shares on the Dividend Aristocrat list.
We’ve put together a list of all 68 dividend aristocrats, along with key financial metrics like price-to-earnings ratios and dividend yields.You can download the full list by clicking the link below.
NextEra Energy, Inc. (NEE) is a Dividend Aristocrat since meeting its 25-year dividend growth target in 2021. It has continued to increase since then.
This article discusses NextEra Energy’s business model, growth prospects and valuation, and determines whether the stock is attractive to income investors at this time.
Business overview
With a market capitalization of approximately $150 billion, NextEra Energy has grown to be one of the world’s largest utility companies since its inception in 1925.
The company has nuclear plants in Iowa, New Hampshire and Wisconsin, but the majority of its business is in Florida. The company consists of three business segments: Florida Power & Light, NextEra Energy Resources, and Gulf Power. The Florida Power & Light and Gulf Power segments are rate-regulated electric power companies that serve more than 5.6 million customer accounts in Florida.
NextEra Energy also owns 83% of NextEra Energy Partners LP (NEP). NEP is a master limited partnership that acquires, owns and operates contracted clean energy projects.
Check out the NEPs featured in our top MLP list here.
NextEra Energy is one of the world’s largest producers of wind and solar energy.
The company receives about two-thirds of its adjusted earnings from its power business and the rest from its renewable energy business. On October 28, 2022, the company announced financial results through September 30, 2022.
Source: Presentation for investors
Revenues for the quarter totaled $6.7 billion, which enabled the company to generate adjusted net income of $1.68 billion. Earnings per share he came in at $0.85, a staggering 13% year-over-year increase.
NextEra has been very successful in growing earnings per share over the long term. Adjusted earnings per share have grown at an average annual growth rate of 7% over the past decade.
growth outlook
NextEra Energy benefits from several key factors that enable the company’s continued growth. Its utility is in one of the nation’s largest states, so it’s well-positioned to reach new customers. Florida’s population continues to grow as well, which could increase the company’s customer base, which should help with future revenue growth.
NextEra is also located in a state that is very constructive in regulating utilities. This allows the company to quickly recoup its investment in new projects. For example, Florida Power & Light, along with Gulf Power, have called for base rate increases of more than $600 million annually in 2023, and have notified regulators that they will see further base rate increases from 2024 onwards. The company’s vast customer base allows it to make large investments without incurring excessively high base rate increases.
But what sets NextEra Energy apart from most of its peers is its 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 MW to its backlog in the third quarter of 2022, increasing its total backlog to nearly 20,000 MW. The company plans to bring most of it online over the next two to three years, and investors can expect even more significant investments in renewable energy assets over the long term. The demand for clean energy continues to grow. NextEra Energy, the biggest name in the industry, could take advantage of this over time.
So it’s no surprise that the company is projecting significant earnings per share growth over the long term.
Source: Presentation for investors
Earnings per share is projected to grow 8% annually over the 2022-2025 timeframe, but NextEra Energy expects earnings per share growth to slow slightly to around 7% over the longer term. doing. As this is in line with NextEra Energy’s historic growth, we believe his earnings per share growth of 7% to 8% per annum over the next five years is realistic.
Competitive Advantage and Recession Performance
Size and scale are NextEra’s biggest competitive advantages. No company in the world can claim a bigger renewable energy business than NextEra. A very large (and growing) customer base is an added benefit.
The company regularly scales significantly through acquisitions, including its $6.5 billion acquisition of Gulf Power from Southern Company in 2019. These acquisitions typically add to NextEra’s earnings per share immediately and deliver significant value to shareholders. Especially if you get additional synergies over time.
Utility stocks are often viewed as reliable investments due to their stable earnings and earnings. This makes these stocks particularly attractive to investors during uncertain times.
NextEra Energy was no exception and performed exceptionally well during the last recession. Listed below are his earnings per share for the company before, during and after the last recession.
- 2006 earnings per share: $0.81
- 2007 earnings per share: $0.82 (up 1.2%)
- 2008 earnings per share: $1.02 (up 24.4%)
- 2009 earnings per share: $0.99 (down 2.9%)
- 2010 earnings per share: $1.19 (up 20.2%)
NextEra Energy’s earnings per share declined slightly in 2009, but overall earnings increased significantly from 2006 to 2010.
At the same time, the company’s dividend continued to increase. Below is his dividend per share for NextEra Energy for the same period.
- 2006 dividend per share: $0.38
- 2007 dividend per share: $0.41 (up 7.9%)
- 2008 dividend per share: $0.45 (up 9.8%)
- 2009 dividend per share: $0.47 (up 4.4%)
- 2010 dividend per share: $0.50 (up 6.4%)
Dividend growth slowed in 2009 compared to the previous year, but increased the following year. NextEra’s dividend has doubled at a rate of about 10% over the past decade. The stock currently yields 2.3%.
Valuation and Expected Return
Based on projected adjusted earnings per share, the price/earnings ratio at the current price is 24.3. NextEra Energy’s long-term average earnings multiple is lower, but that multiple has grown to more than 24 times earnings in recent years.
We believe our five-year target multiple of 24x revenue is fair as it is expensive for most peers in the sector and explains NextEra’s leadership position in renewable energy.
Our target multiple means that multiple compression will be a very small headwind for total returns going forward. Shareholders can see that if the stock were to trade at its target price/earnings ratio by 2028, the valuation would reduce the expected total return by 0.2% annually.
Fortunately, earnings growth and dividend yield also contribute to the total return. We believe that the company’s extensive renewable portfolio, in addition to its growth prospects and competitive advantage, will enable NextEra to grow at an annual rate of 7.5% over the next five years.
Your annual earnings will be:
- 7.5% earnings per share growth
- 2.3% dividend yield
- -0.2% multiple regression
Overall, we expect NextEra Energy to deliver an annual return of 9.6% over the next five years, which is attractive.
final thoughts
There are many positives for investors to find in NextEra Energy. Company size, recession growth potential, and dividend history are just three things we find attractive about a company.
NextEra Energy is also located in states considered very constructive in approving tariff base increases. Florida’s population continues to grow as well, which should provide additional customers.
The company is also adept at making solid additions to its core business through acquisitions. We expect this to hold true in the future as NextEra enhances its organic growth with strategic additions.
Finally, NextEra’s leadership position in the renewable energy sector cannot be overstated. The company has a very large backlog of orders and should see good growth in the next few years.
The high-single-digit total return projections are compelling, but not yet sufficient for a ‘buy’ rating.
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