NextEra Energy Dividend Stock Analysis

| About: NextEra Energy, (NEE)

Summary

NextEra Energy is one of the largest utility companies in North America.

As a leader in renewable energy space, the company attracts plenty of investors looking for renewable energy exposure.

A dividend champion that has raised dividends for 22 consecutive years, the company has an impressive Chowder Rule of 11.96.

NextEra Energy Inc. (NYSE:NEE) through its subsidiaries, generates, transmits, and distributes electric energy in the United States and Canada. The company generates electricity from gas, oil, solar, coal, petroleum coke, nuclear, and wind sources. As of December 31, 2015, it served approximately 9.5 million people through approximately 4.8 million customer accounts in the east and lower west coasts of Florida. The company had approximately 46,400 megawatts of generating capacity. It also leases fiber-optic network capacity and dark fiber to telephone, wireless, and Internet companies. The company was formerly known as FPL Group, Inc. and changed its name to NextEra Energy, Inc. in 2010.

A Closer Look

The electric-only utilities sector has come under immense pressure lately as companies have seen declining revenues and lowered margins. In order to combat this trend, peer companies in the industry have had to resort to diversification of business model by acquiring gas utilities companies. This integrated utilities business is seeing more traction as noted lately with the moves by Southern Company (NYSE:SO) acquiring AGL Resources Inc (NYSE:GAS), and Duke Energy (NYSE:DUK) acquiring Piedmont Natural Gas (NYSE:PNY).

The decline in revenue is seen due to a combination of events and trends. The industry is seeing major moves in energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. In addition, power generating companies are moving to secure natural gas infrastructure as the industry moves to accommodate the US government mandate targeting power plants to cut carbon emissions by 32% (by 2030) on the 2005 levels.

By far the biggest reason why NextEra Energy attracts investors is due to its exposure to the renewable energy space. It is one of the largest, if not the largest, wind and solar energy producer. As such, the company attracts investments looking to get in on this space early on. The company is usually also included in clean energy indexes such as NYSE Bloomberg Americas Clean Energy Index. The energy industry is changing rapidly as solar and wind continue on their exponential growth trajectory. I shared some thoughts on the changing landscape of the energy sector and how investors need to think and invest in this article.

NextEra is also waiting for regulatory approval after making a $4.3B offer to buy Hawaiian Electric Industries (NYSE:HE) in December 2014. The deal is expected to close in June 2016 giving NextEra an increased regulated market share.

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Source: NextEra Energy website)

NextEra is so focused on renewable energy, it formed a new limited partnership in 2014 called NextEra Energy Partners (NYSE:NEP), which can give investors a direct renewable energy investment exposure (& a juicy 4.58% yield). NEP's assets are summarized below.

(Source: NextEra Energy Partners website)

Dividend Stock Analysis

Financials

Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations.

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(Source: Created by author. Data from Morningstar)

Actual: The utility industry is resilient in good and bad times. After seeing some depressed revenues from 2008 to 2012, Next Era has started seeing some increased revenue since. The debt load is manageable with a debt/equity of 1.32. S&P gives it a "A-" credit rating. The company's balance sheets show a current ratio of 0.70 - a bit lower than the peers in the industry.

NEE's yield to maturity is as shown below.

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(Source: Morningstar)

Dividends and Payout Ratios

Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future.

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(Source: Created by author. Data from Morningstar)

Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. NEE is a Dividend Champion having raised dividends consecutively for 22 years. The 1-, 3-, 5- and 10-year dividend CAGRs are 6.2%, 8.7%, 9.0% and 8.1% respectively. Coupled with a current dividend yield of 2.96%, NEE has a Chowder Rule number of 11.96 -- a very respectable high number for the utilities sector. The current payout ratio is 50.4% allowing management plenty of room to raise dividends in the future.

Outstanding Shares

Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.

(Source: Created by author. Data from Morningstar)

Actual: The number of shares increased steadily over the years showing no sign of slowdown.

Book Value and Book Value Growth

Expected: Growing book value per share.

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(Source: Created by author. Data from Morningstar)

Actual: The book value has trended upwards at a good pace over the years.

Valuation

To determine the valuation, I use the Graham Number, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here.

The Graham Number for NEE with a book value per share of $49.01 and TTM EPS of $6.06 is $81.75.

NEE's average yield over the past five years was 3.44% and over the past 10 years was 3.34%. Based on the current annual payout of $3.48, that gives us a fair value of $101.16 and $104.19 over the 5- and 10-year periods, respectively.

The average 5-year P/S is 2.32 and the average 10-year P/S is 1.88. Revenue estimates for next year stand at $41.61 per share, giving a fair value of $96.53 and $78.22 based on 5- and 10-year averages, respectively.

The consensus from analysts is that earnings will rise at 6.96% per year over the next five years. Running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $118.79.

The following charts from F.A.S.T. Graphs provide a perspective on the valuation of NEE.

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(Source: F.A.S.T. Graphs)

The chart above shows that NEE is overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be -12.41%, confirming that the valuation is high.

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(Source: F.A.S.T. Graphs)

Conclusion

Electric-only utilities in general have seen slower sales industry-wide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. Coupled with the new regulations from the US government to reduce carbon emissions, electric utilities have started focusing a shift away from dirty fuels such as coal. However, NextEra Energy has an advantage here as it has focused on renewable energy power generation over the years. The company is still one of the best plays for investors looking to add solar/wind renewable energy exposure to their portfolio. A regular in clean energy indexes, has given NEE a leg up against competition. But investors need to pay close attention to the valuation - as the company appears overvalued by 19%. Based on the valuation metrics used above, giving an equal weight to all metrics, the fair value is computed to be $98.66. Better entry prices are recommended.

Full Disclosure: None. My full list of holdings is available here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.