The hottest utility stock right now is NextEra Energy (NYSE:NEE), which serves most of Florida with a unique business model. The business model is renewable energy. NextEra has a subsidiary called NextEra Energy Resources that buys power from wind and solar farms, then sells it. NextEra’s Florida Power & Light is a customer. For NextEra Energy stock, it’s wash, rinse, repeat.
The company’s green reputation, and a steadily rising dividend, have made it such a hot stock it recently passed Exxon Mobil (NYSE:XOM) in market cap. This came soon after it announced a 4:1 stock split. Analysts say it’s getting a “Biden bump.”
Secret Sauce for NextEra Energy Stock
The secret sauce to NextEra is NextEra Energy Partners (NYSE:NEP). This is a renewable energy producer, mainly owning wind projects. It’s not a master limited partnership (MLP), a structure favored by oil companies, but financially it operates in much the same way.
NextEra launched it in 2014 and it now has a market cap of $4.3 billion. Over the last year its performance has matched that of the parent, with a dividend now yielding 3.43%.
NextEra Energy stock has outperformed NEP over time because NEP often converts debt into equity, diluting its shares. But if you’re looking for both income and capital gains, NEE has 13 GWatts of solar capacity under construction it could sell to NEP. NEP would then re-sell the power, much of it back to NEE, to power a rising dividend.
Is Nuclear Green?
While NextEra has a green reputation, it also operates five nuclear plants, including Seabrook Station in New Hampshire. Built for nearly $13 billion over 14 years, NextEra got 88% of Seabrook for $836 million.
Nuclear facilities are subject to “bathtub economics.” Risks are greatest at the start and end of their useful lives. NextEra buys plants that have been running and will deal with the end costs later.
CEO Jim Robo (he insists on being called Jim) sees nuclear and natural gas as bridges to wind and solar. Nuclear plants provide reliable power he can sell as green to other utilities besides Florida Power & Light. Florida Power, in turn, provides baseload demand for NextEra’s energy production facilities.
Results Don’t Speak to Regulators
This is the way utilities are supposed to work.
But while its neighbors like Southern Co. spend capital building power plants, NextEra mainly buys power. It’s a “capital light” structure that let it generate $8.1 billion in operating cash flow last year, and pay $5.60 per share of dividends, against Southern’s $2.56.
But NextEra Energy stock is so hot that its fatter dividend yields just 1.83%, against Southern’s 4.35%. On the other hand, NextEra stock is up 25% in 2020 while Southern’s is up just 7%. NextEra is a better stock.
Despite its green reputation and bottom-line success, NextEra faces hostile state regulators when it tries to expand. Its 2016 effort to buy Hawaiian Electric Industries was rejected. So was its 2017 effort to buy Oncor Electric Delivery in Texas. Several state regulators, most notably North Carolina’s, would have to approve its acquisition of Duke.
What about buying Southern? It’s about the same size as Duke. But Southern is still building two nuclear plants. The “bathtub theory” suggests NextEra wait until they either break Southern or have a few years’ operating experience proving their safety.
The Bottom Line
While NEE is richly priced at 42 times earnings, it has proven its business model against stiff industry resistance. The only thing that could change its trajectory might be if that resistance breaks.
So far there’s no sign of it.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn