The utilities sector isn’t known for its strong performance, yet NextEra Energy (NYSE: NEE) managed to outperform the S&P 500 through the first six months of 2024. But don’t take this impressive performance with a pinch of salt. Sure, NextEra Energy is well-run and growing fast, but only a certain type of investor should buy the company.
NextEra Energy’s impressive first half of the year
In the first six months of 2024, NextEra Energy shares rose about 16.5%. By comparison, the S&P 500 was up a slightly more modest 14.5%. And the Utilities Select Sector SPDR ETF (NYSEMKT:XLU) was up just 7.5% or so. Clearly, NextEra Energy is standing out, including within the utilities sector, which is an important point to note. That means there’s likely something more going on than a rising tide lifting all boats.
NEE Total Return Level Chart
So what was driving NextEra’s stock price rise? Examining performance a little further back, to year three, reveals key factors behind NextEra Energy’s surprisingly strong performance in the first half of 2024. As the chart below shows, NextEra Energy’s steep decline in 2023 caused it to significantly underperform both the S&P 500 Index and the average utility stock. In fact, even after a strong six-month rally, NextEra Energy’s stock price remained essentially flat for three years, while the average utility stock rose 9% and the S&P rose 28%.
NEE Chart
Simply put, NextEra Energy’s outstanding performance in the first half of 2024 is merely a recovery from a steep decline, and while it’s possible that the outstanding performance will continue going forward, investors probably shouldn’t invest in the stock expecting the same results.
NextEra Energy is well-managed and growing strongly
To be fair, NextEra Energy is a very respected utility. Its base of operations is Florida Power & Light, the largest regulated utility in the United States. Florida is a lucrative market that has benefited from immigration over the years, which has supported the company’s rate increases and requests for approval of its capital investment plans. On top of that base, NextEra Energy has built the largest renewable power company in the world, with large positions in both solar and wind.
Over the past decade, NextEra Energy has grown its dividend at a robust 10% annual rate. That’s impressive for any company, but truly astonishing for a utility. This is what has made NextEra Energy a Wall Street darling and driven it to such a high valuation. This is evidenced by its dividend yield, which has hovered around 1.75% from 2020 through 2022. As the chart below shows, this is significantly lower than the average utility’s yield.
The story continues
NEE Dividend Yield Chart
The big drop in stock prices after interest rates increased reflects investor concern about all utilities. But it also reflects investors selling one of the hottest names in the utilities sector. When Wall Street gets scared, it’s not uncommon for the highest-valued stocks to fall the hardest. For now, using dividend yield as a rough measure of valuation, NextEra Energy’s valuation appears to be about the middle of where it’s been for the past decade. That said, the company’s stock is more expensive than the average utility, suggesting that further upside is probably limited.
Dividend growth investors should buy NextEra Energy
What’s impressive is that NextEra Energy is telling investors to expect 6-8% annual earnings growth through 2027 and 10% annual dividend growth through 2026. So the core business story here remains the same. But investors are again giving this stock a premium valuation, so the opportunity for a big recovery is probably gone. It’s not a good idea to buy the stock in hopes that second-half returns will be as strong as the first half. Still, dividend growth is likely to remain strong, so overall, NextEra Energy is best suited for dividend growth investors. Those looking for attractive yields or value stocks would be better off buying elsewhere.
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Reuben Greg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
This Utility Stock Will Outperform the S&P 500 in the First Half of 2024: Should You Still Buy? was originally published by The Motley Fool.