When to Sell or Strongly Consider Selling:
1.) Dividend is eliminated, cut or held constant
2.) A major reorganization happens
3.) The company has serious changes to fundamentals
4.) The company becomes extremely overvalued
5.) The company has a total return less than 5%/year over last 5 years
6.) The company increased its dividend at a rate below inflation
7.) The company plans to be acquired or merges
Well NEE could possible fit into 4.) above.
NextEra Energy, Inc. (NYSE: NEE) is a leading clean energy company with consolidated revenues of approximately $14.3 billion, more than 42,000 megawatts of generating capacity, and nearly 15,000 employees in 26 states and Canada as of year-end 2012.
One of my issues with NEE is that they are in my portfolio as a utility but the company isn’t acting like a normal utility, the price is acting more like a growth company. Utilities usually provide a higher yield and slower growth. While I have no problems with faster growth, it can put a stock on my radar for possible overvaluation.
My question to myself is: Can I find a better replacement with the proceeds of this sell?
Notice the top graph where the price is well above the normal p/e line. The last time this occurred was between 2006-2008. This was right as the Great Recession was starting. The price of NEE went from about $68 to $43 over the next two years NEE currently has a TTM P/E of 20.3.
The second chart shows the performance over 15 years. $10,000 would have grown to over $40,000. This is an annualized return (with dividends) of 12.3%. This would certainly make me happy. I don’t believe they can sustain this type of growth going forward though.
The next charts show earnings yields over 10 years.
The graph prices are also going off of yesterday’s close. NEE touched $90/share today after an earnings report.
They are projected to have a 9% EPS CAGR over the next 3 years according to Capital IQ. S&P and Morningstar both rate NEE with 3 stars.
NEE is also due for a dividend raise in the next couple of weeks. On 02/15/13, NEE declared a dividend of 0.66 cents, 0.06 (or 10%) higher than the previous dividend of 0.60.
Let’s assume that NEE increases their dividend by another 0.06 in the next two week to 0.72. At a price of $89/share, that is a forward yield of 3.24%. Now this isn’t bad but it’s low for a utility.
Let’s assume that NEE can raise their dividend by 7%/year for the next 10 years. This would give us a 10-year YOC of 6.4%. I typically look for 10% but i can make exceptions for utilities due to their typical slower growth.
Next I need to consider my cost basis. My cost basis is $55.42/share. I if sold all 41 shares at $89/share I would pay taxes on a profit of $1376.78. This would be long term capital gains tax of 15% since I’ve held shares over 12 months. This means I would owe 206.52 in taxes.
Let’s take the total amount of the proceeds 41 shares x $89/share = $3649 and subtract out the tax. This gives us a net amount of $3442.48 to invest.
If NEE does raise their dividend to .72/quarter than my current 41 shares are creating $118.08 in annual dividends. I need to at least replace this amount of dividends with the $3442.48 to even consider this sale.
For instance, I might want to put the proceeds into PM since I find that they are at fair value. PM current trades at $80/share and they have a dividend of .94/quarter. I could buy almost exactly 43 shares of PM. These 43 shares would produce an income of $161.68. This would be an increase of $43.60 in annual dividends. PM is also expected to growth EPS by 9%/year over the next 3 years so this could be a suitable replacement. Morningstar and S&P both rate PM with 4 stars.
Here’s a look at PM’s FAST Graph:
I might also consider adding more MCD with the net proceeds. MCD is currently trading at $94/share. I could buy 36 shares with about $50 left over. These 36 shares would produce annual income of $116.64. This would be about an even replacement for income. The question would be whether nor not MCD would be able to growth their earnings or dividends faster than NEE.
Here’s a look at the FAST Graph for MCD:
According to Capital IQ, MCD’s projected 3-year EPS CAGR is 7%. They are rated 3 stars by S&P and 4 stars by Morningstar.
I could also look for a new utility with a higher current yield.
These are just a couple of ideas I’m tossing around at the moment. I haven’t sold yet but I’m considering selling if NEE rises much further in price and I find a suitable replacement.
What would you do?