NextEra Energy: More Than A Utility (NYSE:NEE)

Thesis Summary

NextEra Energy, Inc. (NYSE:NEE) is a very interesting utility/energy company with investments in the renewable energy industry. The company has posted some good growth figures and has a promising future. Nonetheless, investors must be wary, as the company’s financials are deteriorating, and we don’t yet know if its investments will pay off.

Company Overview

NEE is a diversified utility company with a proven track record of growth and a strong balance sheet. Looking at the latest three years’ performance is the most recent proof of this.

Source: 10-K

While the company suffered a fall in revenue in 2018, it achieved 14.81% revenue growth in the last year. As far as earnings go, we do see a very big decrease in net income from 2018 to 2019, but this is because in 2018 the company received $3.9 million for the sale of NextEra Energy Partners (NYSE:NEP), which also explains the fall in revenue.

NEP is the result of a spin-off from NEE. While NextEra produces and distributes energy, NEP limits its operations to developing renewable energy projects to achieve high and consistent cash flows. To this extent, NEE is still a utility, while NEP is an energy company. NEP also has a more “risky” profile, and this can be seen by the fact that the company offers a yield of 4.26%

As far as financial health, Morningstar shows us the following:

Source: Morningstar

As we can see, the company is solid financially when compared to the utility sector. The D/E is now 1 and financial leverage is just over 3. However, it is worth mentioning that the interest rate coverage has fallen from around 5 to 2.71 after letting go of NextEra Energy Partners.

The bottom line is, the company is expanding aggressively at the moment in solar energy and nuclear power, and this is of course reflected in the balance sheet and its guidance.

NEE is a lot more than a utility company, as it also produces its energy. FPL, NEECH, and more recently Gulf Power are the three subsections of NEE. The real question we must ask ourselves then is, will these investments pay out for NEE?

Betting on Renewables in a Smart Way

There are certainly good things we can say about NEE, both in terms of its environmentally-friendly investments and as a company. One of the things I love about NEE is how diversified its portfolio is. The company not only distributes energy across America, but also produces it in various ways.

Source: 10-K

The company is well-diversified and exposed to wind, solar, nuclear and natural gas, and it provides energy across America and Canada.

Another great thing about NEE is the stickiness of its revenues. The company supplies energy to most households, and it is unlikely that the demand from these will change drastically.

Source: 10-K

As we can see, residential sales make up 89% of customer accounts and 55% of revenues. This is good because it provides a steady and predictable cash flow, which can be used to fund the aggressive expansion that the company is undertaking.

As a whole, the company is delivering strong growth, profitability, and a plan to continue expanding. To top it all off, the company also currently offers an implied 2.64% forward yield. But is the risk worth the payoff?

No Risk, No Reward

One thing is true; NEE has attracted much attention from investors in the last year, and the valuation is rich by most measures. With a P/E of over 25, the company can hardly be considered a utility at this point. Furthermore, it is becoming an increasingly risky investment. The company has expanded its capital expenditure, and this has taken a toll on its cash balance, debt, and interest expenses.

Putting things into perspective, and referring back to the income statement, NEE managed to grow revenues over 10% from 2017 to 2019, but operating income and earnings were much smaller. OI grew in the same time frame by only 3.48%. Not surprising when interest expenses have increased by a whopping 44%.

Of course, this raises a very significant issue, which is the sustainability of the dividend yield. One of the main attractions of this stock is the dividend, which it has paid consistently over the past 25 years and has a 10-year CAGR of 10.22%. However, the continued increase in the valuation has made the yield a lot less attractive than it was before. Currently, the implied forward yield is off 2.34%. This would be fine if growth continues, but the sustainability of the dividend growth is certainly questionable right now.

Source: Seeking Alpha

The growth in the dividend has come hand in hand with increases in the payout ratio. With the company now more leveraged than ever, at 356.06% long-term debt/EBITDA, NEE has to deliver on its growth if it wants to appease investors and creditors alike.

The bottom line is, NEE still has a lot to prove, and investors must be wary that the company’s investment profile is switching from a more predictable utility to a growing energy company.

Takeaway

The coming year will be important to determine the future of the company. NEE has to maintain growth and do some without continuing to hurt the bottom line. I personally like NEE as am a strong believer in renewable energies. Jeremy Rifkin in his presentation on the third industrial revolution points to the fact that soon enough, solar and wind will power our economies at close to zero marginal costs. NEE offers a good way to gain exposure to renewable energies while keeping a foot in a more predictable and steady business model such as in the utility sector.

With that said, the current valuation makes the yield unattractive when compared to peers. Furthermore, the track record of dividend growth is at risk, which is why I give the company a neutral rating.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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