NextEra Energy's Promising Earnings Growth Outlook Underpins Dividend Growth Trajectory

Summary

• NextEra Energy offers investors a compelling combination of dividend growth and capital appreciation upside potential.
• The utility's growth trajectory is stellar, with an eye towards its growing merchant power operations and recent push into the water utilities space.
• Our fair value estimate for shares of NEE sits at $102 per share with room for upside.

inakiantonana/E+ via Getty Images

By Valuentum Analysts

On October 20, the electric utility firm NextEra Energy Inc. (NYSE:NEE) reported third quarter 2021 earnings that missed consensus top-line estimates but beat consensus bottom-line estimates. The company reaffirmed its medium-term guidance in conjunction with its earnings report.

NextEra Energy’s capital appreciation and dividend growth upside potential is quite substantial, in our view. Our fair value estimate for shares of NEE stands at $102 per share with room for upside, as the top end of our fair value estimate range sits at $124 per share of NextEra Energy. We derived NextEra Energy's fair value estimate by forecasting out its future expected "normalized" free cash flows and discounting those free cash flows at the appropriate rate.

Shares of NEE yield ~1.9% as of this writing.

Dividend and EPS Growth Trajectory Remain Strong

In the third quarter of 2021, NextEra Energy’s non-GAAP adjusted diluted EPS grew 12% year-over-year, reaching $0.75. The company’s culture focuses on preparation, and the firm was able to react quickly when Hurricane Ida and Tropical Storm Fred hit the US mainland last quarter, repairing what needed to be repaired in a rapid manner to ensure its customers continued to have access to electricity.

NextEra Energy’s various core businesses including Florida Light & Power (‘FPL’), Gulf Power (now a segment within FPL), and NextEra Energy Resources (‘NEER’) all posted solid earnings last quarter, with FPL leading the way higher. FPL remains NextEra Energy’s largest business segment by adjusted earnings, followed by its NEER segment. At the start of 2021, NextEra Energy integrated its Gulf Power unit into its FPL segment. Here is what NextEra Energy’s press release had to say on the issue:

Effective Jan. 1, 2021, Gulf Power legally merged into Florida Power & Light Company. Gulf Power will continue as a separate reportable segment of Florida Power & Light and NextEra Energy through 2021, serving its existing customers under separate retail rates.

Longer term, the goal is to unify the rates of FPL and Gulf Power, something we will cover later in this article. Pivoting to NextEra Energy’s outlook, the company remains confident it will be able to meet its medium-term guidance after its strong performance during the first three quarters of 2021. For reference, NextEra Energy reported non-GAAP adjusted diluted EPS of $2.31 in 2020, after taking its four-to-one stock split into account which occurred back in October 2020. Here is what NextEra Energy’s latest earning press release had to say regarding its outlook:

NextEra Energy's long-term financial expectations remain unchanged. For 2021, NextEra Energy expects adjusted earnings per share to be in the range of $2.40 to $2.54. For 2022 and 2023, NextEra Energy expects to grow 6% to 8% off the expected 2021 adjusted earnings per share. For 2022 and 2023, this translates to an expected adjusted earnings per share range of $2.55 to $2.75 and $2.77 to $2.97, respectively.

Back in February 2021, NextEra Energy boosted its quarterly dividend 10% on a year-over-year basis (adjusted for the aforementioned stock split) to its current rate of $0.385 per share. Management noted in the company’s dividend increase press release that the utility is “targeting roughly 10% dividend growth per year through at least 2022 off a 2020 base” which will be made possible in part through expected adjusted EPS share growth and its relatively low payout ratio (dividends per share divided by adjusted EPS).

Here is what management had to say in the February 2021 press release:

With a 61% payout ratio at the end of 2020, well below the peer average of approximately 64%, and the continued strength of the earnings and operating cash flow growth at NextEra Energy, we remain well-positioned to continue to support the dividend policy going forward. I believe we continue to offer a best-in-class investor value proposition, with above-average dividend growth and clear visibility to deliver financial results at or near the top end of our adjusted earnings per share expectations ranges in 2021, 2022 and 2023, while at the same time maintaining our strong credit ratings.

NextEra Energy’s payout ratio is at the lower end for publicly-traded utilities, supporting its ability to push through meaningful dividend increases going forward. Using the midpoint of the firm’s adjusted EPS guidance for 2021 and its current annualized dividend payout, NextEra Energy is targeting a payout ratio of ~63% this year.

Image Shown: NextEra Energy’s adjusted EPS growth trajectory remains rock-solid. Image Source: NextEra Energy – Third Quarter of 2021 IR Earnings Presentation

Please note that as a heavily indebted entity, NextEra Energy’s business model requires the firm to continuously tap capital markets to refinance maturing debt, fund its growth ambitions, and cover its dividend obligations. Recent capital market activity indicates that the utility retained access to capital markets at attractive rates last quarter, and we expect that will continue being the case going forward. NextEra Energy exited the third quarter with a total debt load of $48.1 billion (inclusive of short-term debt), offset modestly by $1.1 billion in cash and cash equivalents on hand. The utility is focused on preserving its investment grade credit rating (Baa1/A-/A- with stable outlooks). Due to its complex corporate structure and hefty capital expenditure obligations, NextEra Energy’s cash flow statement can be a messy read, though we appreciate that it generated $6.2 billion in net operating cash flow during the first nine months of 2021. Image Shown: We appreciate NextEra Energy’s focus on preserving its balance sheet strength by keeping its leverage ratios in check. Image Source: NextEra Energy – Third Quarter of 2021 IR Earnings Presentation

During NextEra Energy’s third quarter earnings update, management reiterated the firm’s commitment to meeting its medium-term forecasts. We appreciate NextEra Energy's growing confidence in its growth trajectory.

Operational Update

NextEra Energy, through its NEER business and its merchant power spinoff NextEra Energy Partners LP (NEP), is investing aggressively in renewable energy projects across the US (such as wind farms, solar power plants, and battery storage projects). Please note that NextEra Energy owns a sizable economic interest in NextEra Energy Partners and owns the rate regulated transmission business NextEra Energy Transmission (‘NEET’) via its NEER business, which together form the backbone of its NEER operating segment. Image Shown: A brief overview of the corporate structure of the NextEra Energy family. Image Source: NextEra Energy – 2020 Annual Report

Before getting into its green energy growth ambitions, it is important to note that NextEra Energy utilizes nuclear power and natural gas-fired power plants as baseload generators in its core market of Florida to provide power to the grid when the sun is not shinning, and the wind is not blowing. This does not apply to regions where NextEra Energy only operates merchant power assets. NextEra Energy owns several utilities in Florida that operate power generation, transmission, and distribution assets. In Florida, NextEra Energy’s FPL segment (which as mentioned previously also includes its Gulf Power business) forms the backbone of its rate regulated utility business.

Pivoting back to NextEra Energy’s green energy growth ambitions, here is what its latest earnings press release had to say regarding its development pipeline:

NextEra Energy Resources' development team had a record quarter of origination success, adding approximately 2,160 MW to its backlog. Since the release of NextEra Energy's second-quarter financial results in July, NextEra Energy Resources added approximately 1,240 MW of new wind projects, marking the best-ever quarter of wind additions, 515 MW of new solar projects and 345 MW of new storage projects to its renewables and storage backlog. In addition, NextEra Energy Resources' backlog increased by its share of NextEra Energy Partners' planned acquisition of an approximately 100-MW operating wind project that the partnership is announcing today.

The upcoming graphic down below provides additional information regarding NextEra Energy’s renewable energy development pipeline. By aggressively building out its merchant power business while securing power purchase agreements (‘PPAs’) that support the economics of those projects, the NextEra Energy corporate family’s growth runway is rather large. Please note that PPAs are a key part of this growth story, as they ensure that NextEra Energy and its affiliates will have sizable end demand to cater to. In the past, merchant power expansion plans at other entities ran into industry-wide overcapacity problems which in turn ruined the economics of those endeavors. With PPAs in hand--supporting the growing desire for corporations, households, and various government entities to utilize more green energy--NextEra Energy’s merchant power expansion plans should not run into the same problems that bedeviled its peers roughly two decades ago.

Image Shown: An overview of the NextEra Energy corporate family’s renewable energy development pipeline. Green energy projects underpin NextEra Energy’s promising growth runway. Image Source: NextEra Energy – Third Quarter of 2021 IR Earnings Presentation

During NextEra Energy’s latest earnings call, management noted that the utility’s corporate family had ample growth opportunities in California’s battery storage space, which comes on top of its extensive power generation growth runway in the state. Please note that NextEra Energy’s corporate family has a large power generation footprint in California, particularly as it concerns commercial-scale solar power plants. Here is what management had to say on the issue:

Energy Resources [NEER] also had nearly 300 megawatts of battery storage projects in California. And we continue to experience significant demand from California-based utilities and commercial and industrial customers for reliable energy storage solutions. We're currently developing nearly 2400 megawatts of additional co-located and standalone battery storage projects in California with a potential to be deployed in 2023 and 2024 to enhance reliability and help meet the state's energy storage capacity requirements and ambitious clean energy goals. More than 30 years, we have been investing in clean energy in California at our proud to help the state led the country to a carbon-free, sustainable future. --- Rebecca Kujawa, Executive VP and CFO of NextEra Energy

We appreciate NextEra Energy’s aggressive growth ambitions in the green energy arena and expect the firm will continue locating new opportunities going forward. Last quarter, NextEra Energy’s corporate family secured a 500MW wind farm project related to a green hydrogen development being led by a hydrogen fuel cell company, according to recent management commentary. These types of deals highlight how NextEra Energy has been able to continue growing its green energy project backlog at a robust pace.

FPL Rate Case Update

In August 2021, FPL secured a “comprehensive four-year rate settlement agreement” with several consumer and industry groups in Florida that sets up the utility’s organic growth trajectory quite nicely while ensuring that the electricity bills of its customers remain reasonable. Grid resiliency, grid updates, major solar power plant investments, and electric vehicle (‘EV’) charging infrastructure are some of the key components of the agreement, as is closing a coal-fired power plant in Georgia which FPL has a partial economic interest in and investing in a green hydrogen pilot project in Okeechobee County, Florida.

Future power generation needs can be met through its existing nuclear and gas-fired power plants in the state along with its growing solar power plant presence as NextEra Energy plans to install 30 million solar panels in Florida by 2030 (a strategy aided by battery storage investments such as its soon to be operational FPL Manatee Energy Storage Center project). NextEra Energy has dubbed its solar power plant investments in Florida the “30-by-30” plan which according to an August 2021 press release “remains ahead of schedule and under budget.” We appreciate the utility’s efforts on this front and its solid operational execution seen of late.

The rate base agreement still needs to be approved by state regulators. Here is what NextEra Energy’s management team had to say about the accord and FPL’s recent financial performance during the firm’s latest earnings call (emphasis added):

At FPL, net income increased approximately 10% versus the prior-year comparable period, reflecting contributions from continued investment in the business. Most notably, during the quarter, we reached what we believe is a fair and constructive long-term settlement agreement with a number of interveners in our rate case, continuing a long history of negotiated outcomes that benefit both customers and shareholders.

We believe the agreement, if approved, should enable us to continue to focus on operating the business efficiently while investing in the future to ensure resilience, reliability, affordability, and clean energy for generations to come in Florida, we expect the Florida Public Service Commission to vote on our agreement at its agenda conference on October 26. --- Executive VP and CFO of NextEra Energy

Additionally, NextEra Energy intends to “unify the rates and tariffs of FPL and Gulf Power by implementing a five-year transition rider and credit mechanism to address the initial differences in cost of serving the existing FPL and Gulf Power customers” through a rate plan filed in March according to recent management commentary. Furthermore, it is worth noting that “FPL's typical residential bill is lower today than it was 15 years ago and is well below the national average. The proposed agreement would keep typical residential bills well below the national average” according to management commentary given during NextEra Energy’s latest earnings call.

Moving into Water Utility Space

We were also intrigued by the announcement that NextEra’s NEER segment is moving into the water utility space to grow its exposure (along the margins) to rate regulated utilities. Management had this to say during NextEra Energy’s latest earnings call (emphasis added):

Consistent with our focus on growing our rate -regulated and long-term contracted business operations, during the third quarter, Energy Resources [NEER] entered into an agreement to acquire a portfolio of rate -regulated water and wastewater utility assets in 8 counties near Houston, Texas. The proposed acquisition expands our regulated utility business and an attractive market with significant expected customer growth, and furthers our strategy to build a world-class water utility in the coming years. That's just the regulatory approvals. The acquisition is expected to close in 2022.

Energy Resources is also currently in construction on an innovative water reuse and reclamation project that would help our customer achieve significant savings on its water supply needs and make its operations more efficient and sustainable. All at the same time delivering attractive returns to Energy Resources'. While the roughly $45 million total equity investment for these transactions is small in context of our overall capital program, we are optimistic about the strong growth anticipated in this new market and the potential for clean water solutions to generate additional contracted renewables opportunities going forward. --- Executive VP and CFO of NextEra Energy

These represent relatively small investments for a company the size of NextEra Energy. In our view, the company is dipping its toe into the water utility space to see if there are potentially scalable business opportunities here. Please note that the US water and wastewater utility business is highly decentralized and a prime market for future consolidation, which may represent the longer term opportunity that NextEra Energy is considering by pursuing these relatively minor deals.

Concluding Thoughts

NextEra Energy has a lot on its plate, though the firm has the financial firepower and operational prowess to deliver on all of these fronts. We continue to be huge fans of the utility as its growth runway is simply enormous. Over the coming years, NextEra Energy intends to reward income seeking shareholders with large dividend increases, and we see ample room for further capital appreciation upside as well.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Callum Turcan does not own shares in any of the securities mentioned above. Ratings and data as of November 4. NextEra Energy Inc (NEE) is included in Valuentum’s simulated ESG Newsletter portfolio. For updates, please visit us at www.valuentum.com. This article is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither Valuentum nor any of its affiliates own any securities mentioned in this article. Contact Valuentum for more information about its editorial policies.

Comments

[Veritas1010]

Let it drop, preferably into the $60’s would love to add on a more reasonable price. It surely has dropped a lot already in a few weeks with the rest of th3 “renewables” sector in general.

[MACaDamian]

@Valuentum This company has been Free Cash Flow negative every year from 2012, the latest number being -10.55B equating to (4.95)/Share. How do you find value in this company?

[mmarek evans]

good article.. I was stopped out of 1/2 of long based on the nee/spy pair which has gone from near 2 sigma cheap on 3yr horizon to near 1/2 sigma rich and seems to have rolled over and is now trading 1/2 sigma cheap.. on absolute basis close below 88.66 confirms
1/20 stopped back into NEE as the NEE/SPY pair as seemed to have bottomed.. on absolute basis close above 84.29 confirms
1/25 nee/spy pair approaching multiyear lows.. on absolute basis close below 77.27 indicates breakdown..stopped out of NEE as pair decisively make new multiyear low.. on absolute basis close below aforementioned 77.27 confirms. what a disaster :(
4/18 nee/spy pair seems to be rolling over after trading up to near fair value (3yr horizon)in late march ..on absolute basis close below 82.51 confirms
4/21 nee plunges ...close below 79.28 further confirmation

[smurf]

This author's been on SA for years, and deservedly so, in my opinion.

Another great article.

[richjoy403]

Thanks Valuentum -- I've always given your analyses a 10% 'credibility premium' compared to the typical SA article.

As for $NEE, I've been long since 2011 (per Morningstar: 10-yr TR CAGR = 21.5%), and I consider it 'a growth stock masquerading as a stodgy ute').

Rich-untrack:8hrs

[dgi123]

Regarding the table showing signed contracts, do you know if those are for a specific part of NEE? When I look at their website, they break down energy generation into 3 different groupings (NEE owned, FPL owned, and NEE Resources owned) but the point is that this is overwhelmingly a natural gas company. Even with the new contracts, the primary source of revenue is natural gas so I guess I'm confused why NEE is being swept up in multiple expansion due to excitement about green energy. It seems like the brand of "next era" is more convincing that the actual numbers 😂
www.nexteraenergy.com/...

[Veritas1010]

@Valuentum,

Good detailed overview of a fine company. Arguably the best in the space, and by looking at the biggest CEF’s and ETF’s in the field their management would agree. With YieldCo $NEP they are top notch.

By the way, it has been a long time…great call on the eventual and inevitable AT&T demise (way ahead by years I must add). Glad I too exited before the Titanic push-off on her maiden sail.

Agreed, there is still room to run with this leader in the field in a great regulatory market.

disc.: long $NEE, $NEP.

[Florian Steinberg]

I hold NEE, WEC, XCEL and SO. NEE is valued at much higher multiples than XCEL, which also grows at a healthy clip. I suspect that XCEL will outperform NEE over the next decade, simply due to massive overvaluation of NEE. 35x profits for a highly indebted Ute makes no sense. XCEL trades at 20x profits, which is still not cheap.

I bought NEE for around 100 USD before the split so I can afford to hold. Still concerned about overvaluation....

[HolmesDepot]

Gary Kaltbaum was on the Varney show on Fox Business this morning and had many of the same laudatory things to say about NEE as this report does. Several years ago I had a conversation with an NEE engineer who unabashedly sang the praises of the company and its many new initiatives. I already owned stock at $12 a share and it reinforced my already positive outlook for it. I own other utilities but NEE has performed more like a growth stock than a safe utility. It is my second largest holding after Apple.

[jarratta]

@HolmesDepot I'm not a utility investor. I find then hidebound and bereft of imagination, much less vision. I believe NEE is an exception.

I'm looking for a disrupter in this quasi-monopolistic space.

[Adventureworldwide]

Long NEE for a while. Good stuff.