Seeking Alpha

NextEra: 3 Ways The Kings Of Green Energy Can Make You Rich

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Includes: NEE, NEP
by: Brad Thomas
Brad Thomas
Dividend growth investing, REITs, newsletter provider, value
Summary

Discover what kind of realistic returns both overvalued companies can deliver in the future, and what prices are required for them to deliver historical double-digit and market-beating performance going forward.

NextEra is firing on all cylinders and management thinks its growth will be closer to 8% than 7%.

NextEra Energy and NextEra Energy Partners are far superior ways to profit from the rise of solar and wind power.

This article was co-produced by Dividend Sensei and edited by Brad Thomas.

It's been a great year for the stock market, as well as slow-growing "boring" defensive sectors like utilities.

A Great Year For Utilities

(Source: Ycharts)

Two of my favorite utilities, NextEra Energy (NEE) and NextEra Energy Partners (NEP), have outperformed the sector, delivering outstanding returns as well as safe and rapidly growing dividends.

We consider 11/11 quality Super SWAN (and dividend aristocrat in 2020) NextEra Energy to be the best-regulated utility in America, and NEP is my favorite yieldCo (renewable energy utility). Both have mastered US green energy and proven themselves to be great compounders of income and wealth over time.

NextEra Energy Total Returns Since 1986

(Source: Portfolio Visualizer) portfolio 1 = NEE

NextEra has managed to beat the S&P 500 by 3% annually over the last third of a century, with 77% less volatility over time, and superior average rolling returns across all time periods.

NextEra Energy Partners Total Returns Since 2015

(Source: Portfolio Visualizer) portfolio 1 = NEP

NextEra Energy Partners, the yieldCo that specializes in renewable energy projects NEE builds and then sells to it, has similarly outperformed the S&P 500, with slightly greater but still utility like long-term volatility.

Let's look at three reasons that, at the right price, both NEE and NEP are as close to "must own, buy and hold forever" stocks as exist on Wall Street. But most importantly, discover what kind of realistic returns both overvalued companies can deliver in the future, and what prices are required for them to deliver historical double-digit and market-beating performance going forward.

Photo Source

Great Business Model Built For Safe And Rapid Dividend Growth

NextEra Energy is the sponsor and provides the management for NextEra Energy Partners, whose role is to buy its renewable projects, once long-term power purchase agreements or PPAs have been secured.

Basically NEP is similar to an MLP in that it's a source of financing for NEE's renewable ambitions. NEP is taxed as a corporation, paying qualified dividends and using a 1099 tax form. It's safe to own in retirement accounts such as IRAs and 401Ks.

Morningstar senior utility analyst Andrew Bischof summarizes well why I love NextEra Energy and consider it the hands-down, best-regulated utility in America.

NextEra's high-quality regulated utility in Florida and a fast-growing renewable energy business gives investors the best of both worlds: A secure dividend and industry-leading growth potential." - Morningstar

What's NEE's growth record look like? Whether you consider operating EPS, dividends or total returns, it's the best in the industry over the past 16 years.

(Source: investor presentation)

NextEra Energy's core regulated business is Florida Power & Light and Gulf Power, which combined serve about 5.5 million electric power customers in Florida. Its renewable energy business, NextEra Energy Resources, or NEER, operates under long-term wholesale PPAs and is the largest clean energy supplier in America.

NextEra enjoys some of the highest regulated returns on equity which determine the profitability of its rate base (power-producing assets). Under the current rate agreement, ROE is between 9.6% to 11.6% and was 11.6% in Q3. That's about 2% higher than the national average.

(Source: investor presentation)

That courtesy of the constructive relationship NEE has with its regulators, from a long track record of delivering low power costs, with far better reliability than other Florida utilities.

As a result of selling power to its customers at 20% below the state average, and nearly 30% below the national average, regulators have approved almost $50 billion in growth spending for NEE between 2018 and 2022. This will support a rate base growth of 9% CAGR, the highest I've seen from any regulated utility.

Total growth spending between 2018 and 2022 (including non-regulated renewables) is expected to be $50 to $55 billion, or about $13 billion per year.

Why have regulators allowed so much spending that NEE will have to eventually recoup from Florida residents? Because that capex is expected to benefit not just itself but its customers as well via:

  • 5% reduction in operating costs by 2021 (relative to 2018)

  • 5% lower electricity prices by 2021

  • 10% reduced CO2 emissions by 2021

  • 10% improved reliability (already very high)

Morningstar estimates that growth spending (including NEER) will be about $60 billion through 2023, by far the largest growth runway of any utility in the country.

(Source: investor presentation)

Gulf Power is a utility that NEE bought from Southern Company (SO) in mid 2018 for $6.5 billion. It plans to slash operating costs by 50% within two years and invest nearly $5 billion into expanding those assets.

That plan is popular with Florida regulators because it calls for:

  • Improving reliability by 20%

  • Cuts customer power prices by 20%

  • Reduces Gulf Power's CO2 emissions by 40% (closing coal power plants and switching to gas)

It also would boost Gulf Power's by 56% to $250 million, representing 16% CAGR growth over four years. NextEra Energy is a master of efficient operations and is putting its talents to work improving its latest asset purchase.

But while NEE is the best in the business at running regulated power utilities, it's the wholesale NextEra Energy Resources subsidiary that's the real reason to love this company.

(Source: investor presentation)

NEER is America's largest clean energy producer with 18 GW of capacity all over the country and Canada. 75% of its business is solar and wind, which NEE helps finance through dropdowns to NEP.

NextEra Energy Partners continues to find new growth opportunities, courtesy of its great management team. That includes the Oct. 22, $1.4 billion deal in which it bought Ares Management's (ARES) 22.5% stake in Meade Pipeline.

Meade owns 39% of the 185 mile Central Penn pipeline that transports 1.7 billion cubic feet per day of low-cost Marcellus gas to markets in the mid-Atlantic and southeastern U.S.

The pipeline comes with 14 year fixed-rate and volume committed contracts with investment-grade utilities that are expected to generate about $110 million per year in adjusted EBITDA for NEP or about $1.5 billion over the remaining contract duration.

$63 million per year is how much additional cash available for distribution or CAFD (yieldCo equivalent to FCF) NEP is expecting from the Meade deal representing a sensational 14% CAFD yield on this investment. For context, most yieldCos are happy to earn high single/low double-digit cash yields, and NEE has made sure NEP's latest acquisition is incredibly accretive to cash flow per share.

The deal is being financed with $920 million in project level, self-amortizing debt, including $500 million in seven-year, unsecured bonds at an interest rate of 3.9%. For a BB-rated company, that's an incredibly low-interest rate and shows the benefits NEP enjoys from having the backing of the largest utility in America (by market cap and power generation capacity), with a strong A- credit rating.

(Source: investor presentation)

NEP itself, like most yieldCos, has a junk bond credit rating. Management targets 4 to 5 leverage at the Holdco level and 6 to 7 at the project level. Normally a BB rating wouldn't allow for a 9/11 quality score or 4/5 safety score. But NextEra's sponsorship and excellent management, including helping its yieldCo finance growth projects and sustain a safe 1.2 coverage ratio on its fast-growing dividend make it appropriate.

We only recommend owning the best yieldCos, those sponsored by large and excellently run giants, like NextEra and Brookfield.

Why is Meade such a big deal for NEP? Because despite the potential loss of 8.5% of its cash flow from PG&E reneging on its PPAs (see risk section) NEP's cash flow growth outlook is now secured through at least 2021.

(Source: investor presentation)

That outlook includes 25% annualized CAFD growth from 2018 to 2020, and now sets NEP on the path to 12% to 15% CAGR growth through 2024. Management has been constantly pushing back that date, because NEP's growth runway, courtesy of its sponsorship by NEE, is so long and vast.

Large And Long Growth Runway Makes NextEra "Buy Forever" Stocks

Through 2022 management estimates that 80 GW of new renewable power will be needed in the US. Economies of scale have helped drive solar and wind costs down to levels that are becoming competitive with gas, nuclear and coal, even without tax breaks.

(Source: investor presentation)

Factoring in storage costs, NEE believes that without subsidies, wind and solar can generate power at 3 to 4 cents per kWh by 2024. Which is why it expects solar and wind to represent about 40% of all US power by 2030.

(Source: investor presentation)

The cost of solar and wind has been falling by 15% annually over the past decade, thanks to better economies of scale and steady technology improvements. Granted that includes the production tax credits which are set to phase out over time, but within a few years these clean sources of power will likely be able to stand on their own economically, courtesy of 10% CAGR operational improvements.

(Source: investor presentation)

NEE's estimate of 40% renewable capacity by 2030 is the most bullish estimate I've seen. Lower capacity factors on solar and wind (which only work some of the time) mean that about 20% of US power would be coming from on-shore renewable sources. Factoring in offshore wind, that might potentially rise to as much as 50% per some estimates.

(Source: Motley Fool)

It's going to take a lot of storage to smooth out the variable nature of wind and solar, which is why NEE is investing aggressively into storage as well.

(Source: investor presentation)

While four hours of storage isn't nearly enough to allow renewables to provide 100% baseload power (nationwide we'd need three days of storage capacity for certain winter months), the cost of storage also has been declining rapidly, at 18% CAGR over the past decade.

NEE is investing aggressively to cash in on the secular mega-trend of green energy which is expected to see 15% annual growth in the US through 2030.

(Source: investor presentation)

NEE wants to dominate US renewables. How realistic is that goal? Pretty realistic give that in 2018 alone NEE was the world's largest clean energy provider and just seven countries on earth exceeded its solar capacity installations.

(Source: investor presentation)

NEER plans to complete over 12.3 GW of renewable projects through 2022 alone, and it might exceed that by a wide margin (Morningstar estimates up to 18.5 GW). That's because the company already has secured contracts for 10 GW of projects that it plans to complete by 2022. And it continues to add more projects to its backlog at a torrid pace, including 1.4 GW in Q3 alone.

(Source: investor presentation)

It also has almost 600 MW of storage projects under development to smooth out power production and help solar and wind take over more baseload operations.

(Source: investor presentation)

Half of the solar projects added to NEE's backlog in Q3 (a record amount) will include energy storage.

(Source: investor presentation)

About 50% of NEE's growth spending will be on renewables, averaging $6.6 billion per year.

NEP factors in because that's ultimately who NEER plans to sell its renewable assets to, thus recouping their cost, but benefiting from the steady cash flow they generate. NEE owns about 35% of NEP and thus gets paid distributions plus 25% incentive distribution rights. Basically, this means that 60% of marginal cash flow from NEP flows back to NextEra Energy.

(Source: investor presentation)

Today NEP owns 30% of NEER's assets, which are themselves growing like a weed. NEP's cash flows are under 16-year average remaining contracts with almost 50 investment-grade utilities (and bankrupt PCG).

(Source: investor presentation)

Despite not being structured as an LP, NEP maintains steady 1.2 coverage (1.1 or higher is safe) and won't pay taxes for at least 15 years due to accrued tax incentives on its renewable assets. What's more, should NEP ever run out of solar and wind projects to buy from NEER (not likely) it also has the option to buy from third parties.

Those assets wouldn't be as profitable as what NEER provides, but thanks to NEE's backing, NEP has some of the lowest costs of capital in the yieldCo industry, so they could still fuel further growth.

(Source: investor presentation)

But as I said, that won't be an issue for a long time, if ever. Since NEP IPOd in 2014, it has bought 5 GW worth of solar and wind projects from NEER. But NEER has completed 7 GW worth of projects and that's not counting the 17GW more it plans to build by 2022.

Eventually, NEP might be able to acquire up to 29 GW of projects from NEER, which would represent 600% asset growth. And that's just NextEra's 2022 growth plans. Remember that US solar and wind capacity is slated to grow twice as fast in the 2020s and so NEER could potentially double its growth plans as well.

Its access to a mountain of low-cost capital gives it all the firepower it needs to maintain its status as the world's largest publicly-traded green energy company.

(Source: investor presentation)

Aggressive but disciplined growth spending is part of NEE's plan to continue growing at about 7% over time and delivering about 13% dividend growth through 2020.

Based upon the clear visibility into meaningful growth prospects across all of our businesses, we would be disappointed if we are not able to deliver growth at or near the top end of our adjusted EPS range in 2022." NEE CFO Q3 conference call:

NextEra is firing on all cylinders and managment thinks its growth will be closer to 8% than 7%.

Since 2011 NEE's dividend has grown at 10% CAGR, the fastest of any utility. Management is guiding for 13% growth through 2020 but Morningstar estimates that 14% growth will be possible through 2023.

NEE's payout ratio is expected to be 60% in 2019, and rise gradually to 64% by 2021, according to FactSet Research. That's still below the industry average and safe 75% level and NEE's 46% debt to capital ratio is far below the 60% safe level for its industry. That's why it has an A- credit rating and some of the lowest costs of capital of any regulated utility.

(Source: investor presentation)

NEE's key credit metrics remain strong with management careful to maintain its A- or equity rating from all three credit rating agencies. That conservative use of debt, including a leverage ratio of 4.1 (vs 5.5 or less being safe for regulated utilities) underpins NEE's 5/5 very safe dividend score.

Leading this impressive but disciplined growth effort is CEO James Robo, who has been with the company for 17 years and CEO for seven. Before taking over the top job in 2012, he was COO and oversaw virtually all of NEE's impressive growth over the past two decades. We consider NEE's management the best in the industry, which is why the company has a 3/3 management quality/corporate culture score.

The bottom line is that NEE, while the king of US renewables, has just scratched the surface of its growth runway.

(Source: investor presentation)

By 2030 US renewable capacity is expected to grow almost 400%, and no one is poised to profit from this secular mega-trend like NextEra Energy and NextEra Energy Partners.

(Source: investor presentation)

Using the Gordon Dividend Growth Model (what Dividend Kings and Brookfield Asset Management use as well) NextEra estimates NEP could deliver 16% to 19% total returns. They are right...if you buy the stock at fair value.

Is all this growth potential exciting? You bet. Are long-term income growth investors likely to get rich from it? Only if you buy top quality names like NEE and NEP - at the right price.

Valuation/Total Return Potential: At The Right Price These Are As Close To "Must Own" Stocks As You Can Get

The way we value a company is by applying the average valuation that the market itself has given it over time. Over the long term, and outside of obvious bubbles or bear markets, the market always "weighs the substance of a company" correctly.

(Source: imgflip)

This is the approach that our fellow Dividend Kings and F.A.S.T Graphs co-founder Chuck Carnevale has used for 50 years. Like Mr. Carnevale, we estimate fair values across several metrics, including dividends, earnings, and various forms of cash flow (like operating cash flow, free cash flow, EBITDA, EBIT, and EV/EBITDA).

The range of these fair values likely includes the intrinsic value of a company and the average delivers a reasonable estimate of what it's worth in any given year, based on the consensus expectations for its fundamental results.

Stock

Quality Score

Yield

Current Price

2019 Fair Value

2020 Fair Value

Discount To 2019 Fair Value

5-Year CAGR Total Return Potential

NextEra Energy

11 (Super SWAN) - dividend aristocrat in 2020

2.2%

$227

$154

$166

-48%

-4% to 5%

NextEra Energy Partners

9 (blue chip quality)

4.0%

$52

$42

$49

-23%

-1% to 16%

(Sources: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, management guidance, analyst consensus, Gordon Dividend Growth Model)

Thanks to the strong utility rally this year, created by recession risk peaking at 48% seven weeks ago (and long-term interest rates crashing), both stocks are currently overvalued.

NextEra Energy is benefiting from this bubble via $1.5 billion in equity issuances in Q3 alone, at an average cash cost of equity of just over 3%, about three times less than its ROE.

Long-term rates are likely to rise a bit (about 15 to 30 basis points on the 10-year) due to evidence that the US economy is stabilizing. The fact that Reuters is reporting that a phase one trade deal is "more likely than not" in December and Bloomberg is reporting that it's likely to include phased tariff reductions, makes a gradually rising rate environment the highest probability short-term outcome.

That would likely be bad for overvalued "bond alternative" stocks like NEE and NEP, despite both having very strong growth profiles.

NextEra Energy Growth Profile

  • FactSet long-term growth consensus: 8.0% CAGR

  • Reuters' five-year growth consensus: 8.0% CAGR

  • Ycharts long-term growth consensus: 7.8% CAGR

  • Management guidance: 6% to 8% CAGR

  • Historical growth range: 7% to 15% CAGR

  • F.A.S.T Graphs extrapolated long-term growth rate: 8.2% CAGR

  • Realistic growth range: 5% to 9% CAGR

  • Base case (most likely) long-term growth rate: 8.0% CAGR

  • Historical fair value: 16 to 20 PE

We apply the realistic growth range to a company's own historical fair value multiple ranges, outside of obvious bubbles or bear markets. This is how we generate realistic long-term total return potential ranges.

Conservative 5-Year NEE Return Potential Forecast

The conservative end of our total return potential model always assumes 1% slower growth than the analyst consensus or management guidance. That's to account for any growth challenges that might occur in the next five years.

(Source: F.A.S.T Graphs, FactSet Research)

NEE's overvalued shares might deliver negative total returns over the next half-decade if growth is slower than expected.

Bullish 5-Year NEE Return Potential Forecast

(Source: F.A.S.T Graphs, FactSet Research)

The best-case scenario is NEE delivers modestly positive returns if it beats expectations (as it has a track record of doing), grows at 9%, and trades at the high end of its fair value range.

That might be enough to still beat the S&P 500 over time, given the very low 2% to 7% total returns most asset managers expects from stocks over the next seven to 15 years.

Base Case 5-Year NEE Return Potential Forecast

(Source: F.A.S.T Graphs, FactSet Research)

Here's what we consider our base case. It's from NEE growing at the average consensus rate of 8% and returning to the mid-range of its fair value PE, 18. This potentially results in 2% long-term returns that basically match inflation, resulting in zero real returns over the next five years.

Anyone buying NEE today isn't likely to lose money as long as you have a five-year time horizon. But as we explain in the risk section, very high valuations increase volatility risk. NEE's flat returns aren't likely to come in a straight line but include a surprisingly high amount of volatility (for a utility if you don't realize it's in a bubble) and likely a strong correction or bear market.

NextEra Energy Partners Growth Profile

  • FactSet long-term growth consensus: 18.0% CAGR

  • Reuters' five-year growth consensus: NA

  • YCharts long-term growth consensus: 13.5% CAGR

  • Management guidance: 12% to 15% CAGR

  • F.A.S.T Graphs extrapolated long-term growth rate: 16.6% CAGR

  • Historical growth rate: 17.3% CAGR

  • Realistic growth range: 11% to 18%

  • Base case (most likely) long-term growth rate: 13.5% CAGR

  • historical fair value: 3 to 5 times EBITDA

Conservative Five-Year NEP Return Potential Forecast

(Source: F.A.S.T Graphs, FactSet Research)

If NEP grows slower than expected then a return to the low end of fair value could result in slightly negative returns over the next five years. Fortunately for NEP shareholders (including myself), that's the realistic worst-case scenario.

Bullish 5-Year NEP Return Potential Forecast

(Source: F.A.S.T Graphs, FactSet Research)

The best-case scenario is that NEP achieves the FactSet consensus growth rate and trades at the high end of fair value. That could still deliver market-beating returns that could double your investment over the next five years.

Base Case 5-Year NEP Return Potential Forecast

(Source: F.A.S.T Graphs, FactSet Research)

The most likely returns are from a return to mid-range four times EBITDA and the mid-range of management's long-term guidance. This results in decent long-term return potential that will likely beat or at least match the broader market.

NextEra Energy

Classification

The Margin Of Safety Needed For 11/11 Super SWANs

2019 Price

2020 Price

5-Year CAGR Total Return Potential From This Price

Reasonable Buy

0%

$154

$166

2% to 11%

Good Buy

0%

$154

$166

2% to 11%

Strong Buy

10%

$139

$149

4% to 13%

Very Strong Buy

20%

$123

$133

6% to 15%

(Sources: F.A.S.T Graphs, FactSet Research, Money Chimp)

Buying NextEra near fair value would significantly improve the return potential since the base case is that it would grow as expected (higher end of management guidance).

Buying at fair value essentially results in double-digit total returns over time, and if you buy it when it's a deep value stock (20% discount) then close to 15% long-term returns can be expected, in-line with its historical returns over the past 33 years.

NextEra Energy Partners

Classification

The Margin Of Safety Needed For 9/11 Quality Blue Chips

2019 Price

2020 Price

5-Year CAGR Total Return Potential From This Price

Reasonable Buy

0%

$42

$49

2% to 20%

Good Buy

10%

$38

$44

2% to 20%

Strong Buy

20%

$34

$39

4% to 22%

Very Strong Buy

30%

$29

$34

6% to 24%

(Sources: F.A.S.T Graphs, FactSet Research, Money Chimp)

Given NEP's rapid growth buying at fair value is likely to deliver double-digit total returns. Buying it with a margin of safety could result in very strong returns, including total returns of 20%-plus that could triple your investment over five years.

A margin of safety is important because even safe stocks like NEE and NEP have risk profiles that investors need to consider.

Risks To Consider

NextEra Energy might be an 11/11 quality Super SWAN and future dividend aristocrat but even it has fundamental risks. The biggest of which is whether regulators will grant it continued 11.5% returns on equity that analysts are using to model its roughly 8% long-term growth rate.

NEE's ability to invest $60 billion through 2023 at profitable enough rates of return to deliver its expected growth is likely, given its increasingly friendly relationship with regulators generated by years of low cost and reliable power.

However, there are no guarantees in life, especially on Wall Street. In future economic downturns, or merely with sufficient changes in Florida's political climate, regulators may decide to crack down on "greedy utilities" in the name of political populism.

There's also the political uncertainty surrounding future renewable subsidies, though the current secular trends indicate those may be extended in the coming years. NEE's deep pockets and the rapidly falling cost of renewables mean that NEER's business is certain to grow, the only question is how fast.

NEP's fundamental risk profile is greater than NEE's, if only because the yieldCo business model doesn't allow for strong credit ratings. Only Brookfield Renewable Partners (BEP), which has been around for 20 years, has an investment-grade credit rating (BBB+).

NEP has a BB junk bond credit rating from S&P and that means it has higher costs of capital, especially since its business model requires the use of 4 to 5 times leverage via non-recourse, self-amortizing long-term debt on its projects.

(Source: S&P 2018 Global Default Report)

BB-rated companies have defaulted on their bonds 22% of the time over the past 30 years. Given the very steady nature of NEP's cash flow, courtesy of long-term PPA's with large investment-grade utilities, its default risk is likely far lower than the average BB-rated company.

(Source: YCharts)

Record low long-term Treasury yields have been a boom to BB-rated borrowers like NEP. But junk bond rated companies still have to pay higher interest rates, which also are more volatile over time.

During periods of rising economic uncertainty, like the 2016 oil crash and recession scare, junk bond interest rates soared. And while another financial crisis isn't likely anytime soon, you can see that junk bond yields can rocket much higher than safer forms of corporate debt.

Fortunately NEE's financial might and prowess in structuring private equity deals mean that NEP isn't likely to ever face a liquidity trap. But its long-term growth rate might be impacted should credit markets tighten.

NEP's legal fight with bankrupt utility PG&E (PCG) also shows that PPA's are not a "sure thing." NextEra is fighting in court to prevent PG&E from “abrogating, amending or rejecting” its PPAs which accounted for 8.5% of its solar and wind capacity at the start of 2019. Specifically, NEE has filed a motion with FERC to block any attempt to reset PPA prices at much lower market rates.

According to William Scherman, a partner at Gibson, Dunn & Crutcher LLP in Washington, and former general counsel at FERC, “FERC has usually moved to protect its jurisdiction." So there's a good chance that NEP will win in court, though there are no guarantees.

Fortunately NEE's recent deals with private equity firms to fund accretive NEP deals have ensured that even in a worst-case outcome, NEP will be able to maintain a safe and rapidly growing dividend, through at least 2024.

However, the PG&E soap opera highlights the risks that PPA utilizing yieldCos have over the long-term. PPAs eventually expire and the rapid decline in solar and wind power costs is a double-edged sword. They allow for rapid capacity growth as renewables become more economic, even without tax breaks.

On the other hand, most solar and wind projects have effective lifespans of 30 to 50 years meaning that in the future NEP will need to renegotiate PPAs at much lower rates. This means that to continue growing its cash flow and dividend steadily over time NEP needs to execute on NEE's drop-down plan.

That's highly likely as long as credit markets remain favorable and interest rates low. Higher rates, or tighter credit conditions that raise its cost of capital, could slow growth. NEP's growth in the mid-2030s is surely going to fall, as its PPAs begin to expire and new ones reset at lower market rates for renewable power.

Valuation risk on both NEE and NEP is very high, which is why their total return potential ranges include flat or even negative long-term forward estimates.

Even if you're OK with the possibility of earning nothing on your money, you can't forget about volatility risk, which becomes elevated when the margin of safety is this negative for both stocks.

Are these utilities lower volatility than the broader market? You bet. Does that mean they never experience corrections or bear markets? Not at all.

NextEra Energy Peak Declines Since 1986

(Source: Portfolio Visualizer) portfolio 1 = NEE

Over the past 33 years, NEE has experienced five corrections and five bear markets. That includes a 41% decline (including dividends) over a 17-month period beginning in late 1998. The worst bear market in the company's history took two years to recover from and was helped by the dot com crash, which kicked off a seven-year value rally as tech stocks crashed 80% and defensive names doubled.

NextEra's current PE of almost 28 is literally unprecedented. This Super SWAN future aristocrat has NEVER traded at levels approaching the current multiple.

(Source: F.A.S.T Graphs, FactSet Research)

The pink line is the current PE, and there's no question that the highest quality regulated utility in America is in a bubble right now. That means that the next bear market (NEE is guaranteed to have one eventually) could be the worst it's ever faced, possibly a 50% to 60% decline from its recent highs.

NextEra Energy Partners is less overvalued, but historically a more volatile stock (all yieldCos are relative to utilities).

NEP Peak Declines Since 2015

(Source: Portfolio Visualizer) portfolio 1 = NEP

In 2015 uncertainty surrounding tax breaks for renewable energy combined with a broader market correction to create significant liquidity fears for the new yieldCo industry. As a result, all yieldCos plummeted with NEP falling by 54% in just four months.

NEE's strong financial backing ensured that NEP kept on growing its dividend as expected (3% per quarter like clockwork) and it eventually recovered from that severe bear market.

Future declines are likely to be far milder, but as you can see NEP has had two other corrections since then, including two in 2018 alone. With its valuation now stretched, and long-term rates likely to rise modestly higher in the coming months, NEP might be due for another correction.

The purpose of pointing out the historical volatility and currently elevated valuations in both stocks is to prepare investors for potential buying opportunities in the future.

Despite what the last seven years might indicate, no company, not even market darling NEE, stays overvalued forever.

  • 2000 to 2004 NEE was always undervalued

  • 2004 to 2008 mostly overvalued

  • 2002 to 2012 undervalued the entire time

  • 2012 to 2019 largest bubble in the company's history

Market sentiment is fickle and can change rapidly. But at the same time, long periods of chronic over and undervaluation occur with almost every company.

Knowing market history and sound investing principles focused on fundamentals, valuation, and proper risk management is how long-term investors can make their own luck when it comes to exponentially growing their income and wealth.

(Source: AZ quotes)

Bottom Line: NextEra Is The King Of US Renewables And At The Right Prices "Very Strong Buys"

Green energy is one of the biggest mega-trends in the world today. It's expected to keep growing like a weed not just through 2030, but long past 2050.

Profiting from solar and wind isn't always easy, as euphoric bubble chasing investors learned after President Obama was elected and they bid up solar stocks to stratospheric levels. When China flooded the market with solar panels, prices crashed, many big solar companies went bankrupt, and -85% total returns were the result of anyone buying into the "sure thing" that was solar power.

(Source: YCharts)

NextEra Energy and NextEra Energy Partners are far superior ways to profit from the rise of solar and wind power.

Their safe business models, based on cash flow locked in under 20-year PPAs, is the best way for income investors to gain low-risk exposure to one of the greatest growth stories in human history. Strong access to low-cost capital, plus the most experienced management team with an unbeatable track record of execution, only further strengthens the case for these two "must own, buy and hold forever" dividend stocks.

But while the valuations NEE and NEP find themselves at today aren't anywhere as crazy as solar stocks back in 2008, that doesn't mean you can blindly buy them while ignoring their valuations.

NEE is currently 48% overvalued for 2019 and NEP is 23% overvalued. While you're not likely to lose money over the next five years-plus buying today, there's no margin of safety. High volatility is likely in the future, including possibly the worst bear market in NEE history.

Patient investors who buy NEE at near $166 next year and NEP at $49 or better are likely to fully participate in the strong growth each is likely to enjoy, not just for the next few years, but for the foreseeable future.

Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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.