3 Reasons I Just Bought NextEra Energy Stock
I've had my eye on utility NextEra Energy (NYSE: NEE) for quite some time, but I never got around to adding it to my portfolio. That changed this week, as I finally bought shares of the clean energy giant. Here are the three main reasons why.
1. It's betting big on clean energy
NextEra Energy is already the world leader in generating electricity from the wind and sun after investing tens of billions of dollars over the years to build new renewable power-generating capacity. However, the company isn't stopping while it's ahead. Instead, it's continuing to bet big on clean energy by investing $40 billion through 2020 to build new solar, wind, and storage capacity, as well as more natural gas pipelines.
The reason NextEra is making these investments isn't just because it wants to be a good corporate citizen and help in the battle against climate change. Instead, the main reason it's betting big on clean energy is that these investments earn it the best returns. That's evident in its outsize earnings growth rate over the past several years.
CEO James Robo pointed this out on the fourth-quarter earnings call saying that "dating back to 2005, we've now delivered compound annual growth in adjusted EPS of over 8.5%, which is the highest among all top 10 power companies, who have achieved on average compound annual growth of roughly 3% over the same period." The company expects that high-powered growth to continue in the coming years, forecasting a 6% to 8% compound annual organic earnings growth rate through 2021. However, Robo stated that he "will be disappointed if we are not able to deliver financial results at or near the top end" of that range.
2. It pays an above-average dividend
Another thing I like about NextEra Energy is that it pays a solid dividend. The company currently yields about 2.5%, which is above the roughly 2% average of companies in the S&P 500. Not only is that payout attractive, but it's also on a firm foundation since NextEra pays out only about 58% of its adjusted earnings in dividends, which is a conservative level for a utility since most peers pay out 65%.
However, what's even more attractive than NextEra's current yield is its growth potential. The utility, which has increased its payout at a 9.2% compound annual growth rate since 2005, expects to continue growing it at a high level in the future, targeting 12% to 14% yearly growth through at least 2020.
3. It has the power to continue outperforming
NextEra Energy's clean energy-focused investments have enabled it to consistently increase its earnings and dividends over the years. That growth has helped the company generate total returns that beat not only its utility peers but also the S&P 500. Robo pointed this out on the fourth-quarter call:
While that past performance is no guarantee of success in the future, the company has all the ingredients necessary to continue outperforming the market from here. One key factor driving that belief is the company's plans to keep increasing its dividend over the next few years. That's worth highlighting, since dividend growth stocks have historically outperformed the market:
The significant outperformance by stocks that increase their dividend bodes well for NextEra's chances of continuing to deliver market-beating returns, since it expects to grow both earnings and its shareholder payout at above-average rates over the next few years.
A formula for success
NextEra Energy has made a name for itself by investing heavily to become a leader in clean energy. In doing so, the company has generated above-average earnings growth, which has allowed it to continue growing its dividend. That's been a very successful formula for the company over the years, as it has consistently generated market-beating total returns. That trend appears likely to continue in the future, since the company plans on sticking with its successful formula, which is why I recently added this clean-energy leader to my portfolio.
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Matthew DiLallo owns shares of NextEra Energy. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.