Does This Stock Have the Power for Increased Dividends?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As we continue to power full steam ahead toward the election and fiscal cliff, having some income generating defensive positions is important. A good place to start your search for such a company is in the utility industry. I’m on a personal quest to find a great utility company for both my virtual “No Drip, No Mess” portfolio as well as my own personal portfolio.
Recently, I’ve looked at both Dominion (NYSE: D) and Exelon (NYSE: EXC) and came away impressed with the growth of Dominion’s natural gas business while not being so sure if Exelon’s nuclear sized generation fleet could generate an increasing dividend. Today, I’m taking a look at wind power purveyor NextEra Energy (NYSE: NEE) to see if they have enough power to keep growing their dividend. I’ll be taking a closer look at both their Florida utility and renewable energy businesses to see if they’ll provide the right combination to power my portfolio.
Florida Power & Light (FPL)
This Florida based utility serves about 4.6 million customers making it one of the largest regulated utilities in the country. They’re right in between Exelon and Dominion in terms of utility customer base though they are well below energy powerhouse Duke (NYSE: DUK) and their seven million customers. The biggest question though is the Florida economy; current indicators are still mixed as they were hit hard in the housing bust. It does seem to be looking up though as the unemployment rate has been falling, tourism sales are back past the highs hit just before the recession, confidence is stable and building permits are on the rise. Still growth in their customer accounts has been slow to improve.
What’s most interesting to note is that FPL’s customers are paying about 25% below the national average utility bill. This is due to both operational excellence and a top notch cost advantage. They’re also investing heavily in modernizing their gas generation with also pursuing uprates in their nuclear generation to increase capacity. Finally, and most importantly for investors, they are working with their regulatory authority for rate relief which while having a minimal effect on their customer’s bill, will provide much deserved economic benefits to FPL.
While their utility business will never generate a lot of growth, their energy resources division is one to watch. They have a very large renewable energy backlog which includes 1,150 to 1,500 MW of US wind and another 600 MW of Canadian wind to go with 850 to 950 MW of solar all of which are expected to go into service by 2016. Over the past two years they’ve spent about $4.4 billion dollars on these renewable projects and plan to spend about $2.8 billion over the next two years.
The business has about 16,607 MW in operation which is slightly smaller than the 24,460 MW over at FPL. They have among the lowest emission rates within the nation’s top 50 power producers. They do this with a fleet that’s fueled by 56% natural gas, 22% nuclear, 13% wind along with some coal, oil, hydro and solar. Their wind business is the largest in the nation and one that’ll only grow larger over time. As one of the cleanest merchant fleets in the nation, there is good reason to want this utility in your portfolio.
All the money they are pouring into their business to build cleaner generating assets is a moot point if the company isn’t generating any meaningful growth. NextEra you’ll be happy to know has grown their earnings by 6.9% annually for the past decade while just as importantly been growing their dividend at even faster pace at a 7.5% rate compounded annually. They’ve vastly outperformed their electric utility peers over that decade as their peers have only generated earnings growth of 2.2% and dividend growth of 4.9% over the past decade.
Going forward they are expecting to grow their earnings by up to a dollar per share by 2014 as more of their energy resources projects come online. They expect to be significantly cash flow positive by that date under their current capital plans of a “backlog only” scenario. With a planned 55% payout ratio (up from 49% today) that means their dividend is likely to be powered higher by as much as 10% annually over the next two years. If they do find additional attractive opportunities to pursue it’ll reduce free cash flow but will provide incremental accretion.
I like what I’m seeing from NextEra Energy and they’ll be joining Dominion on my short list of utilities I’d consider buying if the price is right. I like their very predictable dividend growth over the next two years and their clean energy producing portfolio is one to be proud of. The big question mark is if the stock is selling for the same value that they’re offering to their customers on their electric bill.
latimerburned has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources and Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.