The world is in the early stages of a major energy transition, as it looks to shift from carbon fuels to cleaner alternatives. It would be great if such shifts were as easy as flipping a light switch, but that’s just not how things work. This transition is likely to take decades. But that doesn’t mean companies, or investors, should ignore the changes. And that’s why NextEra Energy (NEE -3.36%) and TotalEnergies (TTE -1.91%) are both names to keep an eye on as they look to ensure the world has power today and in the future.
Big and getting bigger
NextEra Energy is one of the largest electric utilities in the U.S. Florida Power & Light is its most important business on that front, supplying power to around 5.7 million customers in the Sunshine State. This is a regulated business, which means that NextEra has a monopoly in the markets it serves and, in exchange, has to get its rates approved by the government. In order to appease regulators, NextEra spends money on upgrading and maintaining its systems.
This relationship means that both financial results and the company’s capital spending tend to be fairly stable over time. In general, utilities are pretty boring and reliable. What makes NextEra so interesting is that the other half of its business is a massive solar and wind operation. In fact, the company claims to be “the world’s largest generator of renewable energy from the wind and sun.” It’s also a big player in the energy storage space, which is an increasingly important component in the transition away from carbon fuels. This is the company’s growth platform, and its being built on top of the boring but reliable electric utility business.
The numbers are pretty astounding. Right now the clean energy operation has roughly 28 gigawatts of generation capacity. Between 2021 and 2024, NextEra believes it can increase that by as much as 30 gigawatts, if it hits its high-side targets. Essentially, NextEra is working to ensure it is providing customers with power today and for decades in the future.
Dirty supporting clean
TotalEnergies is working along a similar theme, but there’s a notable difference — this company is best-known for its oil & gas operations. Indeed, TotalEnergies is one of the world’s largest integrated energy giants, with operations that span the oil, natural gas, and refined products segments of the energy market. Oil drillers are in the crosshairs of environmentalists and environmentally focused ESG investors. Because of this, it is in some ways a bit riskier long-term play than NextEra Energy.
Except that the world still needs oil and natural gas. And that will likely remain the case for decades to come, since major energy transitions take time. So there’s likely to be plenty of profit ahead for TotalEnergies in the carbon space. That said, the company is acting now to adjust so it can remain a vital energy supplier for years to come.
Specifically, it has laid out a plan to refocus on its best oil assets while moving away from lesser oil projects. That will help it shift its carbon business toward natural gas, where it plans to continue growing. Natural gas is expected to be a transition fuel, since it burns more cleanly than coal and oil. And while it is making this more subtle shift, TotalEnergies will be aggressively expanding its electrons business. That includes everything from clean energy production to electric vehicle charging stations. This business is set to triple in size between 2020 and 2030. Simply put, TotalEnergies is working now to make sure it can survive in what is likely to be a very different energy environment in the future.
Worth a deep dive
These two names are worth a close look today, but they are likely to appeal to very different types of investors. NextEra is really a dividend growth stock, as management believes it can grow earnings between 6% and 8% through 2025, with dividends expanding at around a 10% clip. The dividend yield is a somewhat miserly 2.1%, as the company’s growth prospects generally mean investors afford it a premium price. TotalEnergies, despite benefiting from today’s high oil prices, yields 6.1% (note that investors will have to pay French taxes on this income). That’s toward the high end of its peer group and will likely attract dividend investors focused on generating as much income today as they can from their portfolios.