Renewable Dividends: Utilities

Winter holidays over and pocket books a little empty, many investors are understandably looking for income.  What better opportunity to turn an extra coin than a reliable dividend-paying stock.  Equity securities afford an element of inflation protection not available from debt securities and some dividend payments rival even high-yield bonds.  

Conventional wisdom points to utility companies, since the sector has reputation for providing the most generous dividend payments. All the better if it is also an environmentally sound operation. The U.S. Energy Information Agency has forecast a decrease in electricity consumption in 2020 due to the economic impact of the coronavirus pandemic.  However, growth is expected to resume again in 2021 and beyond.  A key driver of electricity demand will be the adoption of electric vehicles.  Another key point in favor of electric utilities is the current low interest rate environment that makes borrowing relatively inexpensive.  Companies in the rate-sensitive and capital-intensive sector should be better able to finance capital investments. 

One of the most frequently mentioned renewable energy utilities that pays a dividend is NextEra Energy (NEE:  NYSE).  The company claims it is the largest single producer of wind and solar energy in the world.  The company operates through two subsidiaries:  Florida Power and Light (FPL), which provides electricity for more than five million customers in that state, and NextEra Energy Resources (NEER), which manages a portfolio of wind and solar energy production plants that serve an additional five million customer accounts.  NextEra’s corporate website offers an interactive map of its energy installations. 

NextEra reported $13.6 billion in operating revenue from energy sales in the first nine months of 2020, most of it from FPL and NEER.  This was off from $14.6 billion in the same period of the previous year as the business shut-down and work-at-home policies to slow the spread of coronavirus across the U.S.  Even in the quarter ending September 2020, after many businesses and schools had gone back to some version of normal operation, revenue was off 14.1% in the recent period. 

Nonetheless NextEra is still reported strong operating profits of $4.2 billion in the first nine months of 2020.  This represents an operating profit margin of 30.7% compared to 30.6% in the same period of the previous year.  Some investors may want to see an increasing operating profit margin.  Indeed, the company has been successful in finding operating efficiencies.  That NextEra managed to maintain its operating profit margin in the highly challenging pandemic period could be considered an accomplishment.

Operating profits are impressive enough, but dividend hunters are more interested in cash flow generation.  After all, it is cash that supports the dividend payment.  Like most utilities NextEra has been a consistent generator of cash.  In the first nine months of 2020, the company converted 48.8% of revenue to operating cash flow, making $6.6 billion available for capital investment and dividend payments.  Most important for dividend seekers is that operating cash flow is largely fueled by operating income and not from management’s manipulation of working capital accounts.

NextEra leadership last declared a dividend in two months ago, which is payable to all shareholders as of November 25, 2020.  In all the company is expected to pay $1.40 in the next twelve months.  At the current price level that represents a forward dividend yield of 1.73%.  Ten-year treasury notes are current priced to yield 1.12%.  The difference in part represents the premium risky securities must offer to entire risk-averse investors.

Risk premium is not the only consideration.  To get the 1.73% dividend yield investors must pony up just over $80.00 per share.  This represents a breath-taking price-earnings multiple of 31.8 times earnings expected in 2021.  By contrast, the current S&P 500 Index is priced at a forward price-earnings multiple of 25.1.  'Need for yield' might be one reason NEE shares are priced at a what appears to be a premium.  Investors can watch for periods of trading weakness to pick up NEE at more attractive prices.    

 

The next post looks at utility sector alternatives.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.