To The Moon

$NextEra(NEE)$

NextEra Energy is one of the top green energy stocks on the market for several reasons. It has a sizable $144 billion market cap, which is rare among green energy companies, most of which are smaller and not yet profitable. NextEra is profitable, has a reasonable PE ratio, and is a reliable dividend payer with a solid track record of growth. Since early 2015, the stock has grown by 250-300%, not including dividend payments.

NextEra Energy is a unique utility stock, differing from the typical high-dividend, low-appreciation utility model. While its dividend is relatively modest at 2.5%, it has shown decent stock price appreciation historically. However, the stock has been stagnant for about three years, prompting speculation about whether it represents a buying opportunity.

NextEra is a large, proven company in a sector where many players are still startups or unprofitable. While its PE ratio of around 30 might have seemed less appealing at one point, it’s currently more attractive at lower levels. Political factors, such as government funding for green energy, could affect the sector, especially with Republicans in control of certain policies. However, the company’s size, profitability, and influence make it well-positioned to weather these changes.

Financial Overview:

Profitability and Growth: The company is profitable, with growing earnings and revenue over time. However, significant revenue growth occurred post-2022, with recent moderation to more typical levels.

Debt Levels: Net debt stands at $81 billion, driven by aggressive capital expenditures exceeding operating cash flow. Operating cash flow is $13 billion annually, while capital expenditures are $26 billion, leading to heavy borrowing.

Segments:Legacy Florida business (Florida Power & Light) provides steady cash flow, with $4.4 billion in net cash generated and $4.26 billion in capex over six months.Renewable energy (NextEra Energy Resources) boasts higher margins but is cash-intensive, generating $2.3 billion in net cash while incurring $10 billion in capex in six months.

Free Cash Flow

NextEra Energy's negative free cash flow is a key risk for the company, as it relies on large capital expenditures to fund its renewable energy growth while borrowing money to cover the gap. Although this strategy may lead to significant growth in the long term, it also increases the company’s debt load and puts pressure on its financial stability.

For NextEra, the large disparity between these two figures results in negative free cash flow. This is a red flag for investors because negative free cash flow means the company is not generating enough cash to cover its investments, let alone pay down debt or return cash to shareholders through dividends or stock buybacks.

Dividend Risk

NextEra is trying to balance its commitment to long-term growth, particularly in renewable energy, with providing a steady dividend to shareholders. If the company continues to prioritize growth, it might have to slow down or cut its dividend to maintain financial flexibility. Conversely, if it prioritizes paying dividends over growth, it could risk missing out on profitable opportunities in the renewable energy sector, which is crucial for its future.

The company's high debt load, negative free cash flow, significant capital expenditures, and reliance on renewable energy investments make the dividend vulnerable to future pressures. Additionally, external factors like rising interest rates and potential regulatory changes could further complicate the situation.

For investors focused on dividends, it’s important to monitor NextEra’s cash flow, debt management, and investment returns in renewable energy. While the company has a strong position in the green energy sector, its dividend strategy might face challenges if cash flow issues persist or if the returns on its renewable investments take longer to materialize.

Risk & Concerns:

Cash Flow and Investments: The company is not free cash flow positive, heavily investing in renewables, and funding this growth through debt and asset sales. It has sold portions of its renewable business, retaining about 80% ownership. NextEra has struggled to be free cash flow positive due to heavy capital expenditures, particularly in its renewable energy investments. The company spends far more on capital expenditures than it generates in operating cash flow, which is not uncommon in high-growth sectors like renewables, but it puts pressure on profitability and the ability to pay down debt.

Debt Burden: Interest payments alone cost $2.6 billion annually, nearly 10% of the company’s operating revenue. Due to its large debt load, NextEra is paying a significant amount of interest. In the past six months, the company has paid around $2.6 billion annually in interest, This high interest burden could limit its ability to reinvest in the business or increase dividends, particularly if debt levels continue to rise.

Dividend Sustainability: Despite negative free cash flow, NextEra pays $4 billion annually in dividends, effectively funded through borrowing.

Uncertain Growth Payoff: Significant investments in renewables aim to position the company for future growth, but the payoff remains uncertain. Analysts project solid but not exceptional growth rates (6-9% annually).

High Debt Levels: NextEra Energy has accumulated a significant amount of debt, currently at around $81 billion. While utilities typically carry debt due to their capital-intensive nature, the scale of NextEra's debt raises concerns about how sustainable this is, especially when the company is not free cash flow positive. The debt burden could become problematic if interest rates rise or if revenue growth slows down.

Valuation

Stock Price Valuation: NextEra's stock is currently trading at a high valuation compared to its tangible book value. The company’s tangible book value is only about $21 per share, while the stock price is significantly higher. This lack of a margin of safety means the stock could be vulnerable to price corrections, especially if growth doesn’t materialize as expected or if interest rates continue to rise.

Conclusion:

While the renewable segment is promising, the combination of high debt, negative free cash flow, and reliance on asset sales poses significant risks. The company's high dividend payout relative to its cash flow sustainability is another red flag. Despite the allure of growth in renewables and rising electricity demand, the lack of a strong margin of safety, given the current valuation, makes the stock less appealing.

For these reasons, this stock may not be a compelling investment at all. If the valuation aligns more closely with tangible book value or the financial dynamics improve, it could warrant reconsideration.

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