NextEra Energy: Well-Managed, But The Dividend's Too Low

Mar. 04, 2022 8:47 PM ETNextEra Energy, Inc. (NEE)38 Comments9 Likes
Hale Stewart profile picture
Hale Stewart
10.59K Followers

Summary

  • NextEra is a green-oriented utility.
  • The company is well-managed.
  • The dividend is too small.

Wind farm at sunset.

iantfoto/E+ via Getty Images

Investment thesis

While NextEra (NYSE:NEE) is a well-run utility, the yield is simply too small in the current environment.

Starting in January, the market's tone definitely changed due to the Federal Reserve becoming more hawkish. The markets switched to a more conservative investment orientation, allocating cash to larger, more-established companies. The war in Ukraine has simply accelerated that trend.

A word about utilities. These are very unique companies. They are heavily regulated. State utility boards approve utility rates. This means that markets don't determine rates. There are formulas used to determine rates that are commonly understood. However, utilities are top-line gross revenue is dictated by the government.

In addition, this is a heavily capital-centric business model. Balance sheets are loaded with debt. The financial division of all of these companies is deeply involved with many aspects of the debt markets, from repos to 30+ year maturities.

Utilities are the quintessential defensive investment. While they certainly won't rally with the bull market during an expansion, they will also hold their value during a slowdown.

Here is a general description of the company from Finviz.com:

NextEra Energy, Inc., through its subsidiaries, generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The company generates electricity through wind, solar, nuclear, and fossil fuel, such as coal and natural gas facilities. It also develops, constructs, and operates long-term contracted assets with a focus on renewable generation facilities, electric transmission facilities, and battery storage projects; and owns, develops, constructs, manages and operates electric generation facilities in wholesale energy markets.

As the name implies, one of the company's focuses is alternative energy, which is evident from this map from the company's 10-K:

Next Era Energy Projects

Next Era Energy Projects (Seeking Alpha/10-K)

Another of the company's subsidiaries is heavily invested in natural gas power generation:

Next Era Florida Operations

Next Era Florida Operations (Seeking Alpha/10-K)

Now let's turn to the company's financials, starting with gross revenue:

NextEra Gross Revenue

NextEra Gross Revenue (Seeking Alpha)

Gross revenue has been stalled in the $17-$19 billion range during the last few years. This isn't fatal. In fact, it's pretty standard for a company of NEE's size.

NextEra Debt/Asset ratio

NextEra Debt/Asset ratio (Seeking Alpha)

The company is managing its debt very well. The debt/asset ratio hasn't broached the 40% level in 10 years.

Next Era Cash Flow

NextEra Cash Flow (Seeking Alpha)

The company spends a lot of cash on investments (remember - this is literally the most capital-intensive business out there). As a result, it has a negative cash balance after paying for capital outlays. That explains the negative numbers in the third row down. But as noted above, the debt/asset ratio is very contained, which means the company is doing a great job managing its debt position. Normally, I'd subtract dividend payments from this number. Here, there's no point since the number would simply be more negative.

However, the number remaining after subtracting dividend payments from EBT (the bottom row) has been positive for the last 10 years. That should make income-oriented investors happy.

However, the company is only yielding 2.16%. Compare that to this list of yields of other diversified utilities:

Yields of diviersified utilities

Yields of diversified utilities (Finviz.com)

There are 20 utilities with better yields. This brings us to the charts:

NEE weekly and daily charts

NEE weekly and daily charts (StockCharts)

The stock broke an uptrend a little over a month ago (left) which it's still trying to recover from (right).

NextEra is a very well-managed company on the cutting-edge of power production. But for our purposes (safety), there are better options. Combine that with the stock charts and you have a pass.

This article was written by

Hale Stewart profile picture
10.59K Followers
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.
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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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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