Investors do not typically associate utility stocks with growth. There is good reason for this connotation, as historically utilities have been linked much more closely to dividends than growth. After all, utilities operate highly regulated business models. Electricity and gas service is not a high-growth industry.

But even within a stodgy industry like utilities, there are pockets of growth. One such area of growth is renewable energy. NextEra Energy (NEE) is leading the pack in renewable energy growth. The company has generated impressive growth in recent years, with plenty of growth left in the tank as the transition to renewable energy is still in its infancy.

Due to its impressive growth, NextEra Energy is a top holding of many institutional investors such as Athanor Capital. Retail investors have also flocked to NextEra because of its 1.9% dividend yield and consistent dividend growth each year.

This article will discuss why NextEra Energy is a strong long-term stock pick for investors interested in a mix of dividends and growth.

Business Overview

NextEra Energy is an electric utility with three operating segments, Florida Power & Light (“FPL”), NextEra Energy Resources (“NEER”), and Gulf Power. FPL and Gulf Power are rate-regulated electric utilities that serve about 5.5 million customer accounts in Florida, while NEER is the largest generator of wind and solar energy in the world. NEE generates roughly two-thirds of adjusted earnings from its electric utilities, whereas the remainder comes from NEER.

NextEra Energy reported its second-quarter financial results on 07/24/20. For the quarter, the company reported revenues of $4.2billion, a decline of 15% compared to the same quarter last year. Still, NEE’s Q1 adjusted earnings climbed almost 14% to $1.3 billion. On a per-share basis, adjusted earnings rose 11% to $2.61.

NextEra Energy’s business remains relatively resilient to COVID-19 impacts. FPL experienced 11%adjusted EPS growth from investments, which easily offset the COVID-19 impacts and unfavorable weather for Gulf Power. The strong customer growth at both FPL and Gulf Power were offset by lower power usage per customer. NEER adjusted EPS growth of 14% was the strongest of the three segments. It also added about 1,730MW to its backlog (a mix of wind, solar and battery storage projects) and expects its 2020 wind and solar projects to be online this year as planned.

Growth Catalyst

The company’s future growth will be generated through organic investments and acquisitions. For example, there was NEE’s acquisition of Gulf Power in January 2019, and it has also taken over ownership interests in two natural gas power plants, Stanton and Oleander, from Southern Energy during December 2018. An additional acquisition, the Florida City Gas transaction, was closed in July 2018. Once fully integrated, these acquisitions are expected to add between $0.15 and $0.20 (combined) in earnings-per-share in 2020 and 2021, respectively.

As one of the biggest utilities in the United States, NEE also benefits from massive scale, which serves as a competitive advantage. Its focus on higher-growth renewable energy projects will allow NextEra Energy to continue to grow faster than its peers.

Dividend Analysis

Investors have benefited from NextEra Energy’s rapid growth in recent years because the company shares its success with shareholders in the form of dividend increases. NextEra Energy expects its adjusted EPS to have a compound annual growth rate of 6% to 8% through 2021. In turn, the stable utility estimates it’d be able to increase the dividend by about 10% through at least 2022. The utility increased its quarterly dividend by 12% to $1.40 per share in the 2020 first quarter.

Such a high rate of earnings and dividend growth is truly rare in the utility sector. Normally, utilities can manage earnings-per-share growth only a couple of percentage points above inflation. But NextEra Energy’s focus on renewable energy has opened up significant growth opportunities. The stock has a below-average dividend yield for a utility, but it makes up for this with a high dividend growth rate. As a result, the stock has broad appeal for dividend growth investors.