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NextEra Energy (NYSE:NEE) is a U.S.-based electric utility. In addition to distributing electricity in Florida, NextEra Energy also owns several generating assets, many of which are based on renewable energy (e.g. wind and sun).

NextEra Energy trades on the New York Stock Exchange under the ticker “NEE”.

NEE is part of the S&P 500 index.

NEE is an American corporation and therefore pays its quarterly dividends in U.S. dollars. All the following figures are thus in U.S. dollars.

Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

NEE pays a quarterly dividend. The dividends are generally declared in February, May, July and October, and are generally paid in March, June, September, and December.

NEE generally increases its quarterly dividend once a year, in February. In that sense, the last increase in February 2014 was of 9.8% (from $0.66 per quarter to $0.7250 per quarter).

Dividend History

With the most recent increase, NEE has increased its quarterly dividend for 20 consecutive years, making NEE a dividend contender (between 10 and 24 years of consecutive dividend increases).

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

(click to enlarge)

What is interesting to see in the recent history of NEE dividends is that the annual dividend growth rate is pretty stable, remaining between 6% and 10%.

In that sense, the most recent dividend increase of 9.8% continues the trend.

Notably, over the last 10 years, the 10-year compound dividend growth rate and the 10-year year-over-year average dividend growth rate have been almost equal (respectively 8.19% and 8.20%). When these two rates are very close to each other, it generally means that the dividend growth has been very smooth and consistent.

On a personal note, I prefer a company with a smooth dividend growth than a company with a more or less random dividend growth. The main reason being that for valuation purposes, it is harder to estimate the future dividend growth rate when the past dividend growth has been all over the place. A smoother dividend growth makes estimates of future dividend growth generally easier.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

(click to enlarge)

Again, as for the dividend growth rate, NEE has maintained a relatively stable payout ratio over the last 10 years. Overall, the payout ratio has remained between 40% and 65%. For a utility, due to the regulated nature of the business, a payout ratio under 65% is generally considered as safe.

So, in my view, the dividend is safe.

The only point I would keep my eyes on is the recent upward trend of the payout ratio. Even though the current payout ratio is still very reasonable near 60%, the fact that the ratio has been rising since 2010 should be monitored. However, at this point, this is no cause for concerns.

With a reasonable and generally stable payout ratio, NEE dividend appears to be safe.

Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

NEE has been increasing its dividend for the last 20 years. So, I don’t see why NEE would stop doing so anytime soon. In that sense, the most recent increase of 9.8% is yet another indication of NEE’s willingness to pay a meaningful and growing dividend.

So, I believe the current dividend is likely to continue growing.

Also, over the last 10 years at least, NEE has increased its dividend by an average of 8.2% annually. As long as the payout ratio remains reasonable, it seems reasonable to believe that NEE will try to maintain that trend.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

The calculations are performed using the affiliated website Dividend Stock Valuation.

For NEE, I’ve used the following inputs:

  • Share price: $96.00
  • Dividend rate: $2.90
  • Dividend growth rate:
    • Optimistic scenario: 8.0%
    • Realistic scenario: 6.4%
    • Pessimistic scenario: 4.8%
  • Discount rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for NEE varies from $65.47 (pessimistic) to $89.54 (optimistic) with a realistic value of $76.37.

With a current share price around $96.00, NEE is simply overvalued.

I’ve also calculated that the DGR would need to be 8.69% over the next 20 years to justify the current price of $96.00. This DGR is just slightly higher than the average year-over-year and compound DGRs of the last 10 years.

If NEE can maintain such a DGR, which I think it can, the current price would not appear significantly overvalued. However, the current price would not provide any margin of safety.

Personally, I prefer to have a margin of safety when I buy a stock. At a current price of $96.00, NEE doesn’t provide any margin of safety should the future DGR be lower.

At $96.00, I think NEE is overvalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For NEE, I’ve used the following inputs:

  • Initial investment: $1000
  • Current yield: 3.02%
  • Dividend growth rate:
    • Optimistic scenario: 8.0%
    • Realistic scenario: 6.4%
    • Pessimistic scenario: 4.8%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% [e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)].

(click to enlarge)

As we can see, the optimistic scenario almost perfectly matches the benchmark stock. This is logical with a DGR of 8% and a yield of almost 3%.

However, this also means that should NEE's future average DGR be lower than 8%, an investment in NEE would return less money than a comparable investment in the benchmark stock. Again, this means that at the current price and yield, NEE does not provide any margin of safety.

At the current price and yield, I think NEE would make a risky dividend investment.

Conclusion

In my view, NEE exhibits several characteristics of a great dividend stock.

NEE has a recent history of stable and very reasonable dividend growth rates, and a recent history of relatively stable payout ratios. However, it seems that these great characteristics are already priced in the stock, making the stock overvalued.

I will definitely keep NEE on my watchlist, but I will wait for the stock to drop near $75 before making a purchase.

Final recommendation: I don’t think NEE is a buy at the current price.

Disclosure: I don’t currently own shares of NEE. I don’t intend to initiate a position in NEE within the next 72 hours.

Source: NextEra Energy Inc. - Dividend Fact Sheet