Is Now the Right Time to Reassess NextEra Energy After 20.5% Year-to-Date Rally?

• Wondering if NextEra Energy is truly a bargain right now? Understanding the real value behind the share price could make all the difference in your investment decision.
• The stock has climbed 3.4% over the past week and is up 20.5% year-to-date. This may signal renewed optimism or perhaps a shift in how investors are assessing risk.
• Recent news about NextEra Energy's continued expansion in renewable energy projects and regulatory updates has kept the company top of mind for growth-focused investors. Industry discussions around clean energy policy have also put the spotlight on utilities like NextEra, drawing attention to its ongoing transformation.
• Our quick check on valuation gives NextEra Energy a 1 out of 6 score for being undervalued, which means there is plenty more to unpack. Up next, we will break down how analysts value the company, and later, we will show you a more insightful way to gauge whether the stock is genuinely a smart buy.

NextEra Energy scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: NextEra Energy Dividend Discount Model (DDM) Analysis

The Dividend Discount Model (DDM) is a valuation approach that estimates the fair value of a stock by projecting its future dividends and discounting them back to today’s value. For utility companies like NextEra Energy, which pay steady dividends, this method can offer meaningful insight into whether the share price reflects the company’s long-term income-generating potential.

NextEra Energy’s most recent annual dividend per share is $2.57, representing a payout ratio of approximately 61% from its earnings. The company reports an expected long-term dividend growth rate of 3.26% based on a capped estimate, with a return on equity of 9.5%. These numbers suggest NextEra Energy prioritizes reliable, gradually rising shareholder payouts rather than aggressive risk-taking or rapid expansion.

According to the DDM, the intrinsic value of NextEra Energy shares is $69.51. The current market price trades 24.1% higher than this estimate. This gap indicates that, based on expected dividend payments and realistic growth prospects, the stock is currently overvalued.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests NextEra Energy may be overvalued by 24.1%. Discover 920 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for NextEra Energy.

Approach 2: NextEra Energy Price vs Earnings

The Price-to-Earnings (PE) ratio is a widely used valuation metric for profitable companies because it connects a company's current share price to its earnings per share. For investors, especially when looking at established and consistently profitable firms like NextEra Energy, the PE ratio offers a straightforward way to judge whether the stock's price reflects its earnings power.

It is important to note that what counts as a "normal" or "fair" PE ratio depends on various factors, such as expectations for future growth and the company's risk profile. Higher growth prospects typically command higher PE multiples, while greater risks generally lead to lower ones.

Currently, NextEra Energy trades at a PE ratio of 27.6x. This is above the electric utilities industry average of 21.0x, and higher than the average of its peers at 25.4x. However, Simply Wall St's proprietary Fair Ratio for NextEra, which considers the company's earnings growth, profit margins, industry, market cap, and risk factors, stands at 28.7x.

The Fair Ratio goes a step beyond simply comparing to industry averages or peers by offering a more tailored benchmark. By factoring in growth and profitability along with industry context and unique business risks, it provides a fuller picture of what a reasonable PE ratio should be for NextEra Energy specifically.

Comparing the Fair Ratio (28.7x) with NextEra's current PE (27.6x) suggests the stock is priced about right based on its earnings outlook and risk profile.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1443 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your NextEra Energy Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives, a simple but powerful tool that allows investors to build a story around NextEra Energy by combining their assumptions about the business with financial forecasts in order to calculate a fair value.

A Narrative links the company’s big-picture story (such as what you expect for its future revenue, earnings, and profit margins) with your own financial forecast and valuation, showing how your perspective translates into a concrete “fair value.”

Narratives make it easy to articulate what you believe and see exactly how those beliefs impact an investment decision, all within the Simply Wall St Community page, where millions of investors compare, discuss, and update Narratives in real time as news and analyst estimates change.

By using Narratives, you can make faster, more transparent decisions by instantly seeing whether your Fair Value is above or below the current market price, and adjust if new events (like earnings releases or policy shifts) impact your investment story.

For instance, one NextEra Energy Narrative might forecast a Fair Value of $103 per share based on aggressive growth and margin assumptions, while a more cautious Narrative could set Fair Value at $52, showing just how much perspectives and potential upside or downside can differ.

Do you think there's more to the story for NextEra Energy? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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