NextEra Energy Remains My Favorite
We all know how much the Biden administration supports green energy initiatives. Given this, it is no surprise that investors are frantically looking to add renewable energy companies to their investment portfolios. The dilemma that many of these investors face is that there are so many renewable energy companies to choose from, that it can be hard to differentiate the good investments from the bad. However, for most beginner investors, I recommend a green energy company that is very safe, incredibly profitable, and yields fantastic dividends: NextEra Energy (NEE). There are many other reasons - both qualitative and quantitative - why NEE is a solid long-term investment.
Qualitatively speaking, NEE has a strong business model consisting of two main businesses: NextEra Energy Resources (NEER) and Florida Power & Light (FPL).
NEER is the world’s largest generator of renewable energy from the wind and sun, with facilities located all over North America. NEER also specializes in nuclear power and natural gas, as well as battery storage projects. This side of NEE’s business model retains massive growth potential. This is because NEER, despite already being very large and well-established, has even more renewable energy projects lined up in its backlog - 15 gigawatts worth, in fact, with about 12 gigawatts worth of solar and wind power projects. This is more than its entire existing portfolio of renewable energy(8)!
Moreover, NEER recently established the Great Pee Dee Mitigation Bank in northeastern South Carolina. The mitigation bank will aim to restore damaged environments like watersheds across the region and then supply environmental credits to interested companies for a fee(2). The environmental credits allow the companies to undertake projects in the area. Not only does this signify another potential source of revenue for NEER, but also this demonstrates that the company’s management is willing to expand the type of services NEE offers in order to grow the company even further.
FPL is the largest supplier of electricity to the state of Florida, supplying electricity to over 10 million Floridians. In general, FPL is also one of the largest U.S. electric utility companies, generating over 75% of NEE’s net income in FY2020(1). FPL’s market share in Florida seems untouchable, making this business a very stable revenue stream for NEE. Additionally, Florida is one of the fastest-growing states in terms of population. This signifies a growing market which NEE will undoubtedly be able to capitalize on, due to its size and reputation.
In terms of key figures, NEE’s earnings are expected to grow 6-8% through 2023(3), largely from NEER’s extensive project backlog. NEE also currently has a stellar 16.22% profit margin as of March 21, 2021(4), which is truly incredible considering the average cross-industries profit margin is 7.71% (5). Of course, what NEE stock’s most decorated feature (quantitatively speaking) is its exceptional dividend growth rate of 7-9% and current dividend yield of 2.2% which is paid every 4 times per year(9).
Evidently, one can see that both NEER and FPL are very well-established and large in scale, offering NEE a sustainable competitive advantage. However, as with any investment, there are considerable risks. For one, many would consider the stock overvalued by conventional standards. For instance, NEE currently has a PE ratio of 47.7x and an EV/EBITDA of 22.13(4). These values seem high, but the company is poised for significant growth as mentioned earlier, and it is in an industry that is almost certainly going to perform well under the current presidential administration.
Another potential cause for concern could be the recent dip in the share price from $87 to $70 in just 2 months(4). However, this is non-unique. Stock prices have dipped across the board in all three major indexes (DIJA, S&P 500, and NASDAQ) due increasing bond yields and speculation over increased interest rates. Although this volatility is likely to continue, the fact that the price has dipped so much almost seems like a positive consideration for the stock as it presents a decent opportunity to buy a long position.
The aforementioned risks are more quantitative in nature (dealing with the stock price, PE ratios, and EV/EBITDA), but what about the qualitative risks? Perhaps the most threatening qualitative risk faced by NEE is that of severe weather. For instance, the state of Florida is known for experiencing severe weather in the form of hurricanes. Nevertheless, NEE has been strengthening its response to such weather problems for many years via hurricane simulation training, implementing wind-resilient transmission structures, etc.(6).
As with any general utility company, FPL retains some risk of environmental regulation. However, given the fact that 74% of FPL’s power generation comes from natural gas (widely considered to be the cleanest fossil fuel) and 22% from nuclear power, it is unlikely that there will be any drastic environmental legislation targeting FPL in the future(7). In fact, due to President Biden’s support of green energy initiatives, we are likely to see legislation that supports NEE in one way or another.
As for NEER, although the company has signed contracts for undertaking 15 GW worth of renewable energy projects in the coming years, there is the risk that these projects do not happen, either due to operational reasons, NIMBY (“not-in-my-backyard”) issues, or other unforeseen circumstances. However, considering NEER’s impressive track record of successfully completing projects without much disruption or delay, it is more than likely that NEER will be able to complete these projects over the next few years without very many issues.
All in all, NEE is one of the safest companies to invest in if you are looking to invest in green energy/utilities. Because of its strong business model, high expected growth and profitability, great dividend yield, and sustainable competitive advantage, there are more reasons than not to invest in this renewable energy and electric utility powerhouse.