NextEra Energy (NYSE:NEE) share price sold off hard in recent months, down more than 20% in the last 180 days.
This dip in share prices has increased the appeal of NEE’s dividend yield and potentially presented a buying opportunity for investors so, is NextEra Energy a stock to buy and hold forever, or is its selloff in recent months justified?
The Bull Case for NextEra
The bullish case on NextEra in today’s environment is fairly straightforward. One of the company’s subsidiaries, Florida Power & Light Company, is an entrenched power supplier that serves about 6 million accounts.
With Florida being one of the fastest-growing states in the country, demand for power there is likely to continue apace, giving NextEra considerable room for growth as it invests in new energy projects.
The other major subsidiary of NextEra is NextEra Energy Resources. Through this subsidiary, NEE has a presence in 49 of the 50 US states. This gives it the potential to take advantage of an expected surge in US energy consumption over the coming several years. Electric vehicles and AI data centers are both expected to add to US energy consumption, increasing total demand by 300 TWh by 2030.
This spike in energy demand will likely benefit entrenched energy companies, a category that certainly includes NextEra. The Florida Power & Light Company is the largest utility in the United States, and NextEra as a whole is among the 10 largest energy companies in the world by market cap.
NextEra is already planning $120 billion in new energy investments in the US over the next few years, increasing its footprint and allowing it to take advantage of the rise in demand that is expected to take place over the same period.
Although management clearly has a heavy focus on renewable energy infrastructure, the company is quite well-diversified. About 55% of NextEra’s energy portfolio comes from renewable sources, while the remaining 45% is made up of a blend of natural gas, nuclear and other energy sources.
Cumulatively, the company’s characteristics lead to a fairly strong bullish thesis. NextEra, already a leader among US energy companies, is in a very strong position to take advantage of the growth that new technologies could bring over the coming several years.
At the same time, ownership of the largest electrical utility in the United States gives it a stable and predictable foundation on which to build.
All told, analysts are expecting to see NextEra’s EPS rise at an annualized rate of 7.7% over the coming five years. This makes the stock a potentially attractive investment for those seeking stable compounding returns.
How Is NextEra Doing Now?
Luckily for shareholders, NEE is already delivering respectable results that seem likely to persist. In Q1, for instance, Florida Power & Light’s net income rose to $1.32 billion from $1.17 billion in the year-ago quarter.
NextEra Energy Resource’s earnings fell from Q1 of 2024, but the subsidiary invested heavily in new infrastructure last quarter. The company’s backlog of projects now totals 28 GW of power generation and storage, reflecting strong ongoing demand.
On a trailing 12-month basis, NextEra has delivered a net margin of 21.8% and an operating margin of 35.5%. The company also modestly outperforms its sector in terms of return on equity. NextEra’s ROE over the last year has been 9.2 percent, compared to 7.9 percent for the sector as a whole.
NEE’s Dividend History
Another point in NextEra’s favor is its high dividend yield and 30-year dividend growth streak. At the moment, shares of NEE pay 3.2% or $2.06 annually.
Though not extremely high as energy stocks go, NextEra pays enough to make it an attractive income producer. Moreover, NextEra’s dividend has grown at an annualized rate of over 11% during the last 10 years.
Right now, NextEra’s dividend payout ratio is somewhat high at 78.8 percent. While not prohibitive in terms of the company’s ability to produce dividend growth, this is toward the higher end of what’s considered a safe payout range for most companies.
Considering the level of growth that the company could produce over the coming few years, though, it’s likely that management will be able to keep raising the dividend at a fairly decent rate.
NextEra’s Valuation Elevated
One thing that could trouble investors about NextEra is the high valuation it’s currently trading at. Shares of NEE are priced at 24.8x earnings, 5.4x sales and 30.9x operating cash flow.
These multiples are quite high, especially for a company in the energy sector. As such, a failure on NextEra’s part to deliver the kind of growth that’s being priced into its shares by the market could result in stagnant or even falling share prices.
Is NextEra a Stock to Buy and Hold?
NextEra Energy stock is trading almost 25% below analysts fair market value of $81 per share, suggesting material upside opportunity for new buyers.
Although NextEra’s pricing may appear a bit high, its strong dividend, good forward growth opportunities and entrenched position as a leading energy company may very well justify the premium. This conclusion certainly seems to be the prevailing one among analysts covering the stock.
It’s also worth noting that NextEra stands out as a decent defensive play. As an energy provider, it is in a stable and predictable line of business. Even if a slowdown temporarily stunts the growth of energy demand, long-term trends strongly suggest that America’s electricity consumption will be heading steadily upward in the coming years.
Overall, NEE could be a solid stock to buy and hold for both its growth alongside the American energy sector as a whole and for its dividend income potential. Though NEE may not deliver enormous returns quickly, the company seems to be in a good position to deliver stable, steady growth over a long period of time.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.