I constructed a screen for U.S. electric utilities to determine each company's projected dividend growth, as well as its relative valuation, and consensus target price, explains Ari Charney, editor of Income without Borders.
Ideally, I'm hoping to find a utility that has above-average projected dividend growth while also trading at a discount to its peers.
By far, the utility with the strongest projected dividend growth is NextEra Energy (NEE), whose payout is forecast to rise a total of 27.7% over the next two fiscal years, or about 13.1% annually.
If reality comports with these forecasts, then that means NextEra's quarterly payout will rise from $3.48 per share annualized in 2016 to $4.45 per share annualized by 2018.
NextEra's strong projected dividend growth is due to the fact that it has one of the best earnings-growth trajectories in the sector, with earnings per share (EPS) forecast to grow 6.8% annually over the next five years.
Consequently, the Florida-based utility giant also enjoys the most bullish analyst sentiment in the sector, with 18 "buys,” three "holds,” and no "sells.”
Even so, the sector-wide correction that began over the summer has brought NextEra's share price back down to Earth. The stock now trades at a slight discount to the average utility and in line with peers on a forward basis.
With a forward yield of 3.0%, NextEra's stock probably won't excite yield chasers. But if you like growth with your income, the consensus 12-month target price is $137, which suggests a potential return of 17.8%.
That's one of the widest gulfs between the current share price and consensus target price in the sector.
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By Ari Charney, Editor of Income without Borders
