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NextEra: A Discounted Dividend Aristocrat playing a major role in the transition to Clean Energy!

Opdateret: 21. jan.

NextEra Energy is an American utility which transmits, distributes, and sells electric power to retail and wholesale customers in North America.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money.

This post is written by Caio Daud. A popular investor on eToro. Learn more about Caio here:

Caio is proud to say he is a Dividend Growth Investor. He is the founder of the Income Growth Office and is passionate about dividends. When he is not reading a book about investing, he is annoying his family and friends with new investment ideas or bragging about a company that has just increased their dividends.

The Income Growth Office is a community managed by seasoned investors. We differentiate ourselves as a community aligned by a profound belief in the potential of Dividend Growth Investing. Follow us on Instagram (The Income Growth Office (@incomegrowthoffice) • Instagram photos and videos) to have access to our FREE Newsletter: My Second Salary. You can check live or copy our Dividend Growth Portfolio, on eToro (@CaioDaud).

If you want want to purchase shares or fractional shares in NextEra Energy, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.

NEE is a key player on one of my favorite sectors in the market: utilities.

In this industry, profitability appears nearly guaranteed due to the lack of negotiation in our electricity bills. We are obligated to pay these bills without any room for negotiation or choice of provider in many cases. Few businesses enjoy such a secure and steady revenue stream. Electricity bills are typically paid on a regular, often monthly, schedule, with occasional exceptions.

It doesn’t matter with we are in the 2020 Covid Pandemic, in the middle of a recession or having to deal with sky high interest rates, our bills have to paid.

Actually, this segment is so profitable for the existing players that the government has to cap the total ROE a company can have, otherwise there could be price abuse in the business. Again, all we can do is accept and pay the bills we receive.

Yet, the barriers are too strong for new entries in the business. An utility business model requires lots of debt to fund new capabilities. It requires good and deep relationships with governments to be granted permissions and licenses or negotiate higher ROEs. For a competitor to start from scratch is basically impossible.

What makes NEE my favorite one in the market is its commitment to clean energy. NextEra Energy is the market leader in Renewable Energy, particularly in wind and solar.

The energy generation and distribution market will face big changes in the near future, moving towards greener sources and NEE is already positioned to leverage on the new opportunities that the market will present.

I chose to write about NEE on my first post, because it got beaten hard this year in the stock market.

As of this writing, NEE is down almost 33% this year!

Three main reasons, according to me, explains NEE rally on the recent past, all due to the same cause: High Interest Rates.

[1]. As mentioned earlier, utilities have a business model that is high-dependent on debt to finance new projects. Debt can become tricky to manage with the constant increase of interest rates.

[2]. Utilities compete with bonds and high yield savings account when investors are deciding where to put their money. During periods of high rates and inflation, bonds and savings accounts become very attractive to investors, and, because of this, there is a general flee from utilities to those safer investment routes.

[3]. Summed to both effects described above, NEP (NextEra Energy Partners LP) , a subsidiary from NEE, has lowered growth guidance, moving from two digits to one, also backed by high interest rates.

NEP is a growth-oriented limited partnership formed to own, operate, and acquire clean energy projects. NEP's primary focus is on acquiring and operating renewable energy assets.

NEP functions in a way that it permits NEE monetizing from it through the selling of renewable energy projects.

In a simple way, NEE can continue with the capital-intensive development of new projects and right after receiving quick payments from NEP, which, in exchange, is granted with consistent cashflows of the already developed projects just bought. This business model is called “yieldco”.

NEE operates through different subsidiaries, the two main ones being: Florida Power & Light Company (FPL) and NextEra Energy Resources. FPL serves customers in Florida, while NextEra Energy Resources focuses on renewable energy generation and development. NEP’s reduction on growth guidance shouldn’t impact significantly NEE.

In my opinion, NEE is just reflecting the utilities general performance this year:

I don’t see any threats to the business and its fundamentals, and I keep my future vision for NEE very positive.

This bright vision for NEE’s future is also backed by the debt position of the company, which, in my opinion, is at totally manageable levels:

NextEra Energy (NEE) holds a relatively low proportion of Variable Rate Debt, accounting for only 24% of its total debt. Variable Rate Debt tends to become costlier when interest rates are high. Furthermore, a substantial portion of NEE's Fixed Rate Debt, approximately 69%, is not due for maturity until 2028 or later. By the time these fixed-rate debts require refinancing, it is anticipated that the high-interest rate environment should have passed.

To close the discussion on the financial position of NEE, the company holds currently an “A-“ Credit Rating, which confirms the sound position of the company.

Another factor on NextEra Energy, VERY IMPORTANT in my opinion, is the constant increase of dividend rates over the years.

NEE has increased its dividends already for 27 years in a row and it’s still able to grow them at 12% annual pace (last 5 years average), characterizing it as a Dividend Aristocrat (more than 25 consecutive years of dividend growth).

The 30% drop on the stock price this year, has brought the dividend yield to a new record high, 50% higher than its 5-year average!

To acquire NEE at current valuations would save us more than 3 years of dividend increases, comparing to an acquisition at the 5-year average dividend yield. This, if NEE keeps with the outstanding increase rate of 12% yearly.

My Target Price for NEE is $46,04, but I’ll start increasing my current position at $50,65.

Dividends remain safe, in my opinion, as Earnings Payout Ratio sits at 56% for the next 12 months. I like to see this number below 75% for utilities.

Moreover, Simply Safe Dividends gives NEE a Dividend Safety Score of 90 (out of 99), implying that dividends are “very safe” and “very unlikely to be cut”

When it comes to total returns, utilities are often seen as mature businesses with low growth prospects. NEE is a good exception, on the last 10 years, it has consistently beaten the market, even taking into account the 30% drop on stock price this year:

NEE continues to rise its earnings year-after-year with a decent sales growth over time:

Under a P/E Ratio perspective, NEE is presenting a 35,5% discount if we compare current and historical values:

To conclude, in my opinion, Mr. Market is presenting us this year with some very interesting valuation levels for NEE, driven mainly by high interest rates.

On the company side, fundamentals remain strong, backed by a growing stream of earning and revenues over the years and a very sound financial position backed by an A- Credit Rating. Dividends look very likely to keep growing at a 2-digit pace and NEE is in a very good position to leverage on the new trends in the energy market.

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My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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