Artificial intelligence (AI) is a headline-grabbing technology that is already having a material impact on the world. While it can do impressive things, there's one major weakness: AI doesn't work without electricity. AI is, after all, just a fancy computer program.
That is why utilities and other power providers are in the news today as they try to keep up with power demand from AI and other technologies, such as electric vehicles. If you are looking for an AI infrastructure play, the world's largest utility, NextEra Energy (NEE 0.33%), could be a great option. Here's why.
Image source: Getty Images.
It is hard for a company to hide when it is the largest in its industry. However, many investors don't fully appreciate the scope of NextEra's offerings. As it exists today, the company operates a large regulated electric utility in Florida and a contract power business. The power business is one of the world's largest producers of solar and wind power. That gives the company two ways to grow, with the contract power business able to respond quickly to AI demand nationwide.
NextEra has been a reliable business for a very long time. Notably, it has increased its dividend annually for over a quarter-century. Annualized dividend growth has been generous, hovering around 10% a year over the past decade. To be fair, the company is trimming its dividend growth target to 6% going forward. But that's still an attractive figure in the utility sector.
Meanwhile, NextEra's dividend yield is 2.8%, notably higher than the average utility's 2.5%. That's a pretty compelling story, bolstered by NextEra Energy's belief that energy demand will increase by 60% between 2025 and 2045. Between 2005 and 2025, demand increased just 10%. The stock is a great option for both dividend growth investors and growth-and-income investors.
The story gets even better when you look at NextEra's proposed acquisition of Dominion Energy (D +0.34%). The deal is expected to improve NextEra's financial position and increase its earnings growth rate. It will also expand the company's geographic reach in its regulated operations to four U.S. states, up from one today. One of the new states, Virginia, is also the top global market for data center capacity. In other words, NextEra will materially expand its ability to service AI customers with this deal.
The acquisition won't happen quickly because the approval process for regulated utility mergers is extensive. It could be a year or longer before NextEra actually buys Dominion. But the acquisition only sweetens the opportunity for long-term investors. NextEra Energy already has a strong business that will benefit from AI's growth and an above-average yield. If you buy NextEra now, you are getting paid very well to wait for the regulatory process to play out and the business's opportunity set to get even better.
If you are looking for a flashy AI technology stock, NextEra Energy will probably leave you feeling a little flat. But some investors don't want to buy a high-risk AI start-up; they want a reliable business with reliable long-term growth potential.
As it stands today, NextEra Energy offers that, with its growth at least partly driven by AI's growing demand for electricity. And the story gets even better once the Dominion acquisition has been consummated. If you haven't been looking at NextEra Energy as an AI infrastructure play, you may want to reconsider, given that it appears to be leaning into the growing power demand from the AI industry.
Reuben Gregg Brewer 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.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Artificial intelligence can't live without electricity, and this utility giant is leaning in as power demand increases.
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