Don’t wait for a stock market crash to buy this growth stock
NextEra Energy (NYSE: NEE) isn’t cheap stock, and it really never is, which is why growth-oriented investors shouldn’t wait for a stock market crash to get started. In fact, it’s not just growth investors who will love NextEra, but the types of dividend growth as well. Here’s what you need to know.
The basis of NextEra’s business is boring old electricity service. Known as Florida Power & Light, this business, along with a few smaller operations in the Sunshine State, serves 11 million customers. It is the largest regulated electric utility in the United States. This means that it has obtained a monopoly in the markets it serves, but in return it must have its tariffs approved by the government.
This is actually a very good deal for the utility as it usually means slow and steady growth over time regardless of what is going on in the stock market. This is driven by the capital expenditure to ensure adequate and reliable supply to customers, which regulators view favorably enough. And Florida’s population has been increasing for years, so NextEra also has the advantage of operating in a truly desirable area.
But nothing here, in and of itself, should excite a growth investor. Utilities are generally slow, steady behemoths that generate reliable cash flow. Where things start to get exciting is that NextEra is using this core business to help fund the construction of a giant renewable energy operation.
The growth engine
NextEra can currently claim to be the world’s largest producer of renewable electricity from solar and wind power. It has therefore clearly made excellent use of the ‘core and exploration’ business model, with the solid base of utilities providing an excellent base for expansion into the rapidly growing renewable energy sector. However, this is far from done – the world is in the midst of a decades-long transition away from carbon fuels.
But some numbers will help you. Between 2021 and 2024, NextEra hopes to build up to 30 gigawatts of renewable energy assets. The company currently has around 22 gigawatts of power in its portfolio, so the goal is essentially to more than double the size of its renewable energy fleet. This is where NextEra’s growth will come from and why growth investors should love the name.
All of these investments are expected to result in adjusted earnings per share growth of between 6% and 8% per year over the next several years at least. And for dividend growth investors, the spending is also expected to lead to 10% dividend growth in 2022.
But, again, some context is needed. NextEra has increased its dividend every year for 27 consecutive years, making it a dividend aristocrat. The dividend growth rate over the past decade, meanwhile, has averaged around 10%. So near-term growth projections here are pretty much standard for NextEra.
Essentially, this mix of a boring utility and a rapidly growing renewable energy company has long rewarded investors for keeping them. As noted, the stock is hardly cheap – its yield is a miserly 1.8%. Indeed, those with a value bias should probably stay away. However, with a growing business in the rapidly growing renewable energy sector, all supported by a strong electric utility operation, NextEra appears extremely well positioned for the future.
Sure, a market downturn may sting in the short term, but in the long term it looks like it will get better and better. And since you can’t predict when the next bear will visit Wall Street, growth investors and dividend growth investors probably shouldn’t risk missing out on NextEra, even if it is trading higher today.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.