In life, bills are unavoidable, and as expenses rise with economic growth, purchasing power can decline unless income keeps pace. To address this, I’ve focused on dividend growth investing, focusing on stocks like NextEra Energy. While I’m not yet financially independent, buying proven companies with cultures focused on rewarding shareholders has allowed my organic income growth to exceed inflation.
The Dividend Aristocrat utility, NextEra Energy (NEE), is one such holding in my dividend growth stock portfolio that is fueling my income growth. A Dividend Aristocrat is a company that has consistently increased its dividend payout for 25 consecutive years or more. As a utility company, NextEra Energy operates in the energy sector, providing essential services such as electricity and natural gas, which typically generate stable cash flow. This stability makes it a strong candidate for dividend growth investing.
After reviewing the company’s third quarter earnings report, I remain optimistic. Allow me to explain why.
Although NextEra Energy’s third-quarter financial results shared on October 23 were mixed, the results were enough for me to maintain my optimistic outlook. The company’s total revenue rose 5.5% year over year to $7.6 billion in the quarter, which was $500 million below analyst consensus. This was largely due to temporary disruptions from Hurricanes Helene and Milton and lower fuel costs that affected how much NextEra Energy could charge customers as a regulated utility.
The company’s adjusted diluted earnings per share rose 9.6% from the year-ago period to $1.03 in the third quarter. Putting it into perspective, this was above analyst consensus for the quarter by $0.05. Lower fuel costs and operational efficiencies helped NextEra Energy’s non-GAAP net profit margin grow 130 basis points to 28.1% in the quarter.
Besides the recent results, another reason I like NextEra Energy is that it has the wind at its back to drive more growth. Florida’s population growth in recent decades appears likely to hold for the foreseeable future as more Americans are drawn to the state for a variety of reasons, including its climate and vibrant economy. The state’s population is predicted to increase by about two million people to nearly 25 million between 2024 and 2029.
Continued net migration to Florida is driving NextEra Energy’s substantial investments in expanding and modernizing infrastructure to accommodate a growing customer base. During the current four-year settlement agreement, the FPL subsidiary is expected to make more than $34 billion in capital investments. This could drive the high-single-digit annual interest rate base growth needed to push adjusted diluted earnings per share higher.
Therefore, analysts agree that NextEra Energy’s adjusted diluted earnings per share will rise 7.7% to $3.42 in 2024. For 2025, adjusted diluted earnings per share are expected to grow by 7.9% to $3.68. In 2026, adjusted diluted earnings per share are forecast to rise another 8.4% to $3.99. For what it’s worth, these estimates are in line with NextEra Energy’s financial expectations for annual growth of 6% to 8% on 2024 adjusted diluted earnings per share of $3.23 to $3.43.
Another facet of my bullish sentiment toward NextEra Energy is its market-beating and reliably growing dividend. The company’s 2.8% dividend yield is double that of the S&P 500 index (SPX) 1.3% return. NextEra Energy’s dividend payout ratio is expected to be in the low 60% range by 2024, supporting the company’s pledge to pay out an annual dividend increase of around 10% through at least 2026. That may be an excellent combination of starting income and growth potential. to extend the company’s 30-year dividend growth streak.
NextEra Energy also has the financial resources to fund its growth plans. That’s because the company has access to cheap debt thanks to S&P Global’s (SPGI) A rating with a stable outlook. This allows the company to invest in projects at an attractive spread of what it can earn from regulators versus the cost of capital. NextEra Energy’s FFO/debt ratio is expected to exceed 18% in 2024. For more color, this is firmly within the 13% to 23% range that S&P wants to see to preserve corporate credit. Additionally, NextEra Energy’s debt-to-capital ratio of approximately 50% is further confirmation that the company is well capitalized for a regulated utility.
NextEra Energy stock appears to offer tangible value relative to its current share price, which is another reason why I like it. The current year price/earnings ratio of 21.8 and the forward price/earnings ratio of 20.2 are each below the ten-year average of 23.8. NextEra Energy’s high-single-digit growth prospects also seem to support the argument that growth remains solid. With interest rates slowly coming back down, I think this is a clear catalyst for the stock to rebound to a multiple of 23 or 24.
Looking at Wall Street, analysts have a Moderate Buy rating consensus on NextEra Energy. Of the fourteen analysts, nine have been given a buy rating, four a hold rating and one a sell rating in the past three months. The average NEE 12-month price target of $88.69 implies an upside potential of 18.9%.
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NextEra Energy is a company that I am happy to have in my portfolio. Florida demographic trends and investment plans should ensure the utility has a long growth trajectory. NextEra Energy’s investment-grade balance sheet strengthens the company’s spending ambitions. Its track record of three decades of dividend growth proves that it is a very shareholder-oriented company. The valuation of NextEra Energy is the last piece of the puzzle why I am starting the reporting with a buy recommendation.
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