Infrastructure

Why Investors Should Not Expect a NextEra Stock Split to Act Like Apple or Tesla

NextEra Energy Inc. (NYSE: NEE) has created some buzz around its stock on the heels of announcing a 4-for-1 stock split. While stock splits do not technically create anything real value in the shares, they do create some mental excitement for some shareholders. Perhaps the real issue is the company’s 2020 guidance.

The recent stocks split announcements from Apple Inc. (NASDAQ: AAPL) and Tesla Inc. (NASDAQ: TSLA) were both followed by tremendous stock surges. Those surges were then followed by a serious sell-off. 24/7 Wall St. outlined the history of post-Apple splits and the guideline followed a similar path of selling off. Tesla shares are also sold off, and NextEra better hope it’s stock does not bubble up too much based on very premium valuations just because of 4-for-1 split.

NextEra increased its financial expectations for 2021 and 2022, and the company even extended its longer-term growth outlook into 2023. What is already the largest U.S. utility by market capitalization raised its 2021 guidance range by $0.20 per share with adjusted earnings per share now expected to come in a range of $9.60 to $10.15 per share.

NextEra Energy also expects its adjusted earnings to grow between 6% to 8% in 2022 and 2023 off the expected increased 2021 adjusted earnings per share. The company was also kind enough to give Wall Street analysts new post-split earnings ranges to eliminate any misunderstandings or miscalculations.

NextEra’s higher guidance was said to be a reflection of its continued strong performance across all businesses. The company also cited being as well-positioned as it ever has been with excellent growth prospects ahead. Perhaps what should really be taken to heart here is that this should offer plenty of room for NextEra to continue on its path of dividend hikes.

One similar issue to Tim Cook and Elon Musk for the respective Apple and Tesla splits, the company noted in its release that it intends to make stock ownership of NextEra Energy more accessible to a broader base of investors.

The company has given what will now be its post-split annual adjusted earnings guidance figures, as follows:

  • For 2020, earnings per share of $2.18 to $2.30;
  • for 2021, earnings per share of $2.40 to $2.54;
  • for 2022 earnings per share of of $2.55 to $2.75;
  • and for 2023, earnings per share of $2.77 to $2.97.

Many investors may just look at NextEra as a boring utility stock. The problem with pigeon-holing utilities together is that it has a market cap of $144 billion after Tuesday’s split and higher guidance too the shares up 4.5% to $294.75. This is America’s only $100 billion-plus utility, and NextEra’s stock has risen so much that the current dividend yield is now just under 2%.

Among all of the 28 companies classified under the utilities sector in the S&P 500, NextEra’s low dividend yield is ranked 27th of 28 due to its stock price having risen so much — and its performance stands out with it being the number-1 year-to-date stock performer at better than 16%. This also ranks it as more than double the market cap of the next closest America utility (Dominion at $67 billion).

Where things get very tricky ahead is that NextEra’s new guidance for this year and next is creating P/E ratios. The new ranges at the mid-point generate expected P/E ratios of about 33 for this year and about 30 for next year.

Jim Robo, Chairman and CEO of NextEra, said:

The market for low-cost renewables continues to rapidly expand, and we believe our best-in-class development skills leave us uniquely positioned to capitalize on these significant investment opportunities. As a result of the strength and diversity of NextEra Energy’s underlying businesses, I will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted earnings per share expectations ranges in 2020, 2021, 2022, and now 2023, while at the same time maintaining our strong credit ratings and, most importantly, continuing to reliably deliver for our customers. We have a long-standing track record of delivering value for our shareholders and remain focused on delivering on all of our commitments going forward.

NextEra Energy Partners LP (NYSE: NEP) has also seen a halo-effect from the renewables commentary in its units as a result, which makes sense consider that the unit operates contracted clean energy projects. Its units were up 2.3% at $59.57, but that is still short of its 52-week high of $64.41. Its market cap is not quite $4 billion and the yield (equivalent) was listed as almost 4%.

While investors love stock splits on the surface, what they really love is what comes ahead of and into those stock splits — strong performance for a long time, and generally positive momentum on the views for the near future.

Investors should refrain from thinking that America’s top utility will repeat the zany and crazy split-related performance seen by Apple and then by Tesla into their splits. Then again, logic often doesn’t matter when it comes to how much investors are willing to pay up for quality and growth in a world that is currently starving for either one of those traits.

24/7 Wall St. has long considered that 13 other stocks should split their shares, but NextEra was never on that list.