NextEra Energy could benefit from an accelerated energy transition (NYSE:NEE)
NextEra Energy, Inc. (NYSE:NEE) is a company that generates, transmits, distributes and sells electricity to retail and wholesale customers in North America. They focus on generating electricity from renewable (wind, solar) and non-renewable (nuclear, coal and natural gas) energy sources.
The company’s stock price is down about 14% year-to-date, compared to the more than 18% drop in the market as a whole.
As investors often believe that utility companies could provide some level of security in a volatile market, particularly when consumer confidence is low, we believe NEE should continue to outperform the broader market in the near term.
In this article, we will take a closer look at what could make NEE an attractive investment option now.
Downwind from the energy transition
Our need for energy is higher than ever, and it is expected to continue to grow in the decades to come. Currently, most of the energy we use is generated from fossil fuels, including, for example, coal, crude oil and natural gas.
The increasing consumption of energy, generated mainly from crude oil, coal and natural gas, has led to a significant increase in greenhouse gas emissions, raising serious concerns about the negative impact of humanity on the climate.
There have been many initiatives in the past, which we aim to reduce our emissions and moderate climate change. Perhaps one of the best-known agreements is what is known as the Paris Agreement.
Part of the solution could be to partially or completely move away from non-renewable energy sources. The energy transition is often defined as a process of replacing fossil fuels with renewable energy sources. If the idea of energy transition is not new, in the current context, the process is likely to accelerate.
In its presentation to investors, NextEra Energy highlighted some of the key drivers, which could lead to an increase in demand for renewable energy sources.
Three key factors globally define the expectations of growing demand: economic, sustainable and regulatory.
Although the three pillars are equally important, we believe that in today’s market, the economic factor could be the most powerful driver.
In 2022, crude oil, natural gas and coal prices have skyrocketed.
These extremely high fossil fuel prices have also led to a significant increase in energy prices. Much of this price action was caused by the “reopening of the economy” following the COVID-19 pandemic and the ongoing geopolitical tension in the Eastern European region. As the duration of the conflict and its consequences are very uncertain, we believe that fossil fuel prices must remain high for the remainder of 2022. Although OPEC+ has agreed to increase oil production by an amount greater than expected in July and August, in order to increase supply and potentially reduce prices, there are several other factors that cause price levels to remain high. For example, the Freeport LNG plant incident and Europe’s uncertain energy security driven by fears of supply disruptions from Russia.
In our view, when fossil fuel prices are extraordinarily high, investing in renewable energy projects becomes significantly more attractive. This could eventually lead to a substantial gain in the share of renewable energy sources in the energy mix.
We expect NextEra Energy to be well positioned to be one of the key players in the long-term energy transition story. For this reason, we believe the stock could be an attractive buy for investors with a long-term, ESG-focused investment horizon.
Now let’s take a closer look at what we love about NextEra Energy itself.
Performance in times of low consumer confidence
Consumer confidence is often seen as one of the leading economic indicators, which could potentially predict a change in the trend of consumer spending in the near future.
In times of low consumer confidence, consumers often reduce their spending on durable, discretionary and non-essential goods. One or the other could either cut back on purchases altogether, delay purchases, or switch to cheaper and more affordable alternatives. In these times, companies that sell this type of product normally perform poorly on the stock market. On the other hand, some sectors seem less impacted by consumer confidence. Utilities are often considered one of these sectors.
Given that consumer confidence has steadily declined over the past few months, even falling below the levels we saw during the 2008-2009 financial crisis, we believe it is important to consider add to our portfolios companies that are relatively resistant to this type of change. .
So how has NEE really fared over the past 20 years in times of low consumer confidence?
NEE and the S&P 500 (SPY) ended this period in negative territory. However, while SPY is down over 32%, NEE’s price is down “only” 16%.
Between 2007 and 2010, the period in which the financial crisis also occurred, shows a similar trend to our first example. But once again, NEE largely outperformed the broader market.
During this period, NEE and SPY increased in value. But once again NextEra Energy outperformed the broader market gaining over 33% over the period.
Although past performance is not always a reliable predictor of future performance, we believe that due to the favorable energy transition, NEE is well positioned to outperform again in the current market environment.
Capital gain, however, is not the only source of return when investing in NextEra shares.
NextEra Energy has a strong track record of returning value to its shareholders in the form of dividend payments.
In fact, the company has paid dividends to its shareholders for the past 32 consecutive years, while they have also managed to increase the amount paid each year for the past 27 years.
Currently, the firm pays a quarterly dividend of $0.43 per share, which corresponds to an annual yield of 2.1%.
When considering investing in a company for its dividends, it is essential to understand if these payments are safe and sustainable. Year-over-year, the company has a (non-GAAP) dividend payout ratio (TTM) of 62% and a cash flow payout ratio (TTM) of 39%, which are roughly in line with the median of the utility sector. As we expect the energy transition to benefit NEE in the coming years, we believe that the payment of the current dividend is safe and sustainable in the near future.
Key points to remember
We are bullish on NextEra Energy due to the tailwinds created by the potential acceleration of the energy transition and the growing share of renewable energy sources in the energy mix.
It’s also important to note that the company has outperformed the broader market three out of three times in times of low consumer confidence.
Capital gains are not the only source of income for NEE shareholders. The company has a strong track record of returning value to its shareholders in the form of quarterly dividends.