In a year full of surprises, we recommend that investors be selective with their utility selections;...
NextEra: A Unique Hybrid in Utilities
08/20/2018 5:00 am EST
NextEra Energy (NEE) is a unique hybrid of regulated and deregulated companies. FPL, the regulated entity, provides electricity and other utility services to approximately 5 million Floridians and is the largest regulated utility in the U.S., explains Stephen Leeb, editor of Investing Daily's The Complete Investor.
The deregulated entity, NextEra Energy Resources (NEER), is the country’s largest provider of solar and wind energy. NEER also produces nuclear energy and provides the supply chains and energy and construction services needed for its renewable energy portfolio. These services range from battery storage to transmission facilities and infrastructure.
Over the past decade NextEra has outperformed every meaningful benchmark, from utilities indexes to bond indexes to the S&P 500. A portion of its renewable energies is represented in its nearly 80%-owned yieldco NextEra Energy Partners LP (NEP), which is a recommendation in our Income/Value Portfolio.
NEER now generates nearly 20,000 megawatts of renewable energy in over 25 states and four Canadian provinces and also has a small footprint in Spain — a spectacular 13-fold rise from the 1,500 megawatts it produced in 2002, translating into annualized growth of more than 17%.
We expect more of the same going forward as both solar and wind, already more than competitive with other energy sources, become even cheaper.
NextEra’s leadership in renewables has been underpinned by its exceptionally well-managed regulated utility, which has consistently outperformed regulatory metrics and has generated cash needed to fund other projects.
Today NEER is nearly as large as FPL, which sets the stage for the much faster-growing deregulated company to generate ever faster full-company growth. Per-share earnings, which were $6.70 in 2017, could reach $10.00 by 2021 — an annualized rate of 10.5%. Moreover, any shortfall in oil or gas supplies would boost demand for renewables, positively affecting NextEra’s long-term growth.
While the upside in the stock is substantial, downside protection comes from the major regulated utility. Even if the economy slows sharply, the company’s dividend — with a current bond-competitive yield of 2.6% — should be protected.
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