Is NextEra Energy the Best Renewable Energy Stock?

NextEra owns Florida Power & Light Company, the largest electric utility in America. It serves about 5.8 million customer accounts, providing clean electricity to more than 12 million individuals across Florida. 

NextEra’s share price has increased by over 20% this year but will the upward trend continue?

NextEra Has Tailwinds

The renewable energy industry’s future looks strong thanks to the rising need for clean energy solutions. The American Clean Power Association reported a major increase in fresh capacity across U.S. utility-scale solar, wind, and storage domains, showing a 28% climb from last year’s installation volumes.

Government support has been a tailwind also. The Bipartisan Infrastructure Investment and Jobs Act and the U.S. Inflation Reduction Act have set aside $550 billion and $370 billion, respectively, for improving energy security and supporting clean energy initiatives.

This government support has contributed to faster installations and higher production capacity in the clean energy industry that has been an accelerant to NextEra’s own initiatives.

Capacity Growing Rapidly Bodes Well

NextEra expects huge growth in the United States renewables and storage market, projecting it to increase threefold in the next seven years. The market is expected to grow from about 140 gigawatts to around 375 to 450 gigawatts. 

Recently, the industry shared strong results for the fiscal 2024 first quarter, with FPL and NextEra Energy Resources reporting solid financials.

FPL added 1,640 megawatts of new and affordable solar power to its operations while NextEra Energy Resources added about 2,765 megawatts of new renewable energy and storage to its backlog. These rank among the company’s best reported figures ever.

Furthermore, NextEra Energy Resources LLC, together with Entergy Corporation (NYSE: ETR), recently announced an agreement to work together on developing up to 4.5 gigawatts of new solar energy and storage projects. Entergy is a Fortune 500 company that supplies electricity for three million individuals living in Arkansas, Louisiana, Mississippi, and Texas.

This agreement strengthens their partnership by adding an extra 4.5 gigawatts to the more than 1.7 gigawatts of renewable energy projects NextEra is already working on with Entergy. This should help NextEra meet the increasing demand for sustainable energy.

Strong Financials

In the first quarter of 2024, which ended on March 31, 2024, NextEra’s operating revenues were $5.73 billion. Adjusted earnings and earnings per share increased by 11.6% and 8.3% from last year to $1.87 billion and $0.91, respectively.

The company’s cash inflow from operating activities rose 83.9% compared to the same quarter last year, reaching $3.08 billion. As of March 31, 2024, NextEra’s total assets were $179.95 billion, up from the $177.49 billion noted on December 31, 2023.

This strong financial performance in early 2024 demonstrates the strength of NextEra’s growth strategy.

How Is NextEra’s Growth Outlook?

For 2024, management forecasts adjusted earnings per share will fall between $3.23 and $3.43, thereby providing a good foundation for future development and setting NextEra up for financial success in the coming years. NextEra expects adjusted earnings per share to increase by around 6% to 8% in 2025 and 2026.

For income-oriented investors, NextEra plans to grow its dividends per share by about 10% each year, using 2024 as the baseline, until at least 2026. 

Currently, NextEra pays an annual dividend of $2.06, a 2.81% yield at the present stock price. The company has increased dividends for 28 years straight and had a CAGR of 10.7% in the last five years, proving it can deliver to shareholders solid returns.

NextEra Pluses and Minuses

In the plus column for NextEra energy is that the 5-year revenue growth and net income growth forecasts are expected to be just north of 6%.

While that is a slowdown from the past 5 years, where NextEra posted 10.9% annually on average to the top line, the growth is a positive signal that regardless of higher rates or economic headwinds, the company is forecast to grow.

So too the ongoing and modestly attractive dividend should keep income-oriented investors relatively pleased about the prospect of earnings a predictable and steady income stream.

The price-to-earnings ratio of 24x, though, it somewhat elevated for a utility like NextEra and suggests it’s likely trading at a premium, a topic we’ll cover below when we address valuation.

Nonetheless, with $25 billion of revenues and $5 billion of net income, there is enough to like about NextEra to suggest it’s a good staple stock in most portfolios, if for no other reason than power demands are not going to dissipate anytime soon in a hot climate like Florida.

What’s Next?

For the fiscal 2024’s second quarter, which ended in June, the company’s revenue is predicted to grow marginally year-over-year to $7.40 billion, while its EPS for the same period is expected to grow 5.9% from the prior year’s quarter to $0.93. Plus, the company has beaten its predicted EPS numbers in the last four quarters.

Looking ahead, for the fiscal 2024’s third quarter ending in September 2024, NextEra’s revenue and EPS are expected to increase by 10.7% and 6.5% year-over-year to $7.94 billion and $1.00, respectively. That said, analysts have given a target price of $78.44, which shows an increase of 10.77% from the current price.

As a note of caution we should highlight that a 5-year discounted cash flow forecast is substantially less optimistic and places fair value at $38 per share. A 10-year DCF is more bullish but still puts intrinsic value at closer to $46 per share, suggesting there is material downside risk at least on a cash flows basis.

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