Many market observers have called for a recession in recent years, but it still hasn't happened. Despite some bumps in the road here and there, the American and global economies continue to hum along.
There are new concerns that the record-breaking market expansion might be challenged by the economic impact of the coronavirus outbreak (or, perhaps more accurately, the impact of the response to the coronavirus outbreak) emanating from China. Even in that scenario, it's important to remember that recessions are a normal feature of the economy.
When the next one hits, investors shouldn't panic. In fact, you can even play a little defense by buying stakes in recession-proof stocks like NextEra Energy (NEE -0.36%) and Essential Utilities (WTRG -0.41%). Here's why these solid businesses deserve a closer look.
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The world's leading renewable energy company
NextEra Energy has quietly been one of the best stocks of the 21st century. It went from a market valuation of less than $10 billion at the start of the century to a market cap of $130 billion today. When dividend payments are factored into the calculation, shares have delivered a total return of 2,350% in that span.
While investors probably cannot expect another 1,000% return in the near term, NextEra Energy provides a way to own two important pieces of the power sector: electric utilities and power generation.
The company's two electric utilities, Florida Power and Light (FPL) and Gulf Power, both deliver electricity to customers in Florida. FPL alone generated $2.3 billion in net income in 2019. The smaller, recently acquired Gulf Power generated only $200 million in adjusted earnings last year, but that marked a 25% increase from 2018. NextEra Energy has ambitious plans to drive down costs, improve service reliability, and increase operating efficiency at Gulf Power in the next few years.
Meanwhile, NextEra Energy Resources (NEER) builds, operates, and sells power generation assets to electric utilities across the country. It generates more electricity from the wind and sun than any other company on the planet. In fact, if NEER was a country, then it would rank eighth in installed onshore wind power capacity. It generated $1.8 billion in net income in 2019.
NextEra Energy is a recession-proof business because electric utilities are highly regulated, which provides a guaranteed income stream and rewards operating efficiency. That bodes well for FPL and Gulf Power, but also for NEER, which counts numerous electric utilities as customers.
And, as the company noted on its fourth-quarter 2019 earnings conference call, onshore wind and utility-scale solar are expected to become the lowest-cost source of electricity in the United States by the middle of the decade. That provides an excellent growth opportunity for NEER and should also benefit FPL and Gulf Power, which are building tens of millions of solar panels in the next decade. Simply put, NextEra Energy is a great dividend stock for investors with a long-term mindset.
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New name, new structure, new growth opportunity
When water utility Aqua America finally closed its acquisition of natural gas utility Peoples, the combined entity decided to change its name to Essential Utilities. The name is fitting: Running water and heating fuels are essential for modern life.
In water, Essential Utilities owns over 13,300 miles of water lines and 188 wastewater treatment plants, and serves 1 million customers across eight states. In natural gas, the company owns over 15,200 miles of natural gas distribution pipelines and another 2,400 miles of gathering pipelines, and serves over 740,000 customers in three states, although most are in Pennsylvania.
Similar to electric utilities, both water and natural gas utilities are highly regulated. That provides a guaranteed income stream and aligns the interests of the company with its ratepayers. As Essential Utilities invests in and modernizes its infrastructure, it can request rate increases from state regulators.
The new company will look to quickly leverage its size. Today, the rate base of Essential Utilities is comprised of approximately $5 billion in water infrastructure and $2.2 billion in natural gas infrastructure. But the business expects to invest $1.4 billion in infrastructure through the end of 2021. While some of that value will be wrapped up in replacing aging assets, Essential Utilities expects to grow its rate base by 7% per year in 2020 and 2021.
The higher the rate base, the higher the earnings that can be generated in the future. Simply put, the combination of water and natural gas creates a unique opportunity for investors seeking low-risk, recession-proof stocks.
