NextEra Expects to Grow Its Dividend 6% a Year Through 2028. Here's Why That's Enough.
NextEra Energy(NYSE: NEE) has guided for 6% dividend growth over the next two years. This marks a slowdown in dividend growth, given that the utility company's payout has been growing by 10% per year in recent years.
Yet while declining payout growth would seem like bad news for a utility stock , a type of stock highly favored by dividend-focused investors, for NextEra, this slowdown may actually be great for total return prospects in the years ahead.
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A new era for NextEra Energy
NextEra's dividend slowdown makes perfect sense in light of its pending merger with Dominion Energy(NYSE: D). Although management intends for the transaction to create cost synergies from increased scale, reducing the speed of dividend growth will help to conserve cash, providing a financial buffer in case integration takes longer than expected.
It's also prudent for NextEra to preserve cash in light of its efforts to further expand its energy generation infrastructure to meet growing demand from artificial intelligence (AI) data centers.
The potential payoff for investors
If NextEra's capital allocation plan succeeds, expect more to get excited about than just the prospect of sustained dividend growth. Management has also guided for earnings growth of 8% or more each year from now through 2032. Even if the stock -- which is trading for around 19 times forward earnings, below its recent average multiple in the low 20s -- fails to experience multiple expansion, a long-term rise in tandem with earnings growth, coupled with its 3% dividend, stands to produce solid total returns in the years ahead.
Don't get me wrong. Many hiccups could arise from the Dominion merger, especially as regulators in Virginia, one of Dominion's key markets, call for stringent concessions that exceed NextEra's residential bill credit offer. Still, with NextEra's valuation decline, this uncertainty has likely been priced into the shares.
With valuation mitigating downside risk and the Dominion merger and AI power build-out serving as catalysts, NextEra seems like a solid long-term buy for investors. Great stock price gains could counter slowing dividend growth.
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy .
NextEra Expects to Grow Its Dividend 6% a Year Through 2028. Here's Why That's Enough. was originally published by The Motley Fool
