NextEra Energy is expected to pay a dividend of $5 per share in 2019, which indicates a yield of 2.1%. Its stock is up almost 35% so far this year, indicating a much better performance than utilities at large.
NextEra Energy offers one of the lowest yields
NextEra Energy, the biggest utility by market cap, has the lowest dividend yield among its peers. The Utilities Select Sector SPDR ETF (XLU), the representative of the top utility stocks, has a yield of approximately 3%. NextEra Energy has always offered a discounted yield to the industry average. Peers Duke Energy (DUK) and Southern Company (SO) offer dividend yields of around 4.4% and 4.0%, respectively.
However, what makes NextEra’s dividend profile attractive is its dividend growth. NextEra Energy has increased its dividend by 11.5% compounded annually in the last five years. Utilities at large raised their dividends by an average of 4% in the same period. NextEra Energy’s superior earnings growth has fueled its premium dividend growth for the last several years.
Going forward, the utility aims to grow its EPS by around 7% per year, higher than the industry average. Thus, investors could expect superior dividend growth from NextEra Energy. Based on analysts’ estimates, it will pay a dividend of $5.56 per share in 2020.
Top utilities’ payout ratios
Utilities generally pay a large portion of their earnings as dividends to shareholders. Thus, they have relatively high payout ratios. However, NextEra Energy’s payout ratio has been lower than utilities’ average in the last few years. In 2019, it’s expected to be close to 60% compared to its five-year average of 46%. Broader utilities have an average payout ratio of around 70%. Duke Energy’s and Southern Company’s payout ratios came in at around 75% and 80%, respectively, in 2019.
NextEra Energy’s above-average earnings growth has influenced its market performance in the last several years. NEE has consistently outperformed its peers recently. In the last five years, NextEra has returned 160% (including dividends), while XLU has returned approximately 65%. Duke Energy and Southern Company, though they offer much higher yields, have returned 36% and 70%, respectively. NextEra Energy has beat its peers as well as the S&P 500 Index (SPY) in the period.
NEE’s price targets
Barclays raised NextEra Energy’s price target from $230 to $242 on November 21. This target represents a potential upside of just 4% for the stock over the next 12 months. It’s currently trading at $233.4.
Wall Street analysts largely seem positive on NEE. Of the 16 analysts covering it, ten recommend “buys,” five recommend “strong buys,” and one recommends a “hold” as of November 25.
Read more about utilities’ energy mixes and how renewables contribute to their generation mixes in US Utilities Paint a Grim Picture of Power Generation Mix.