The Sparks Are Flying

 | Oct 31, 2012 | 4:20 PM EDT  | Comments
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According to a filing with the Securities and Exchange Commission, William Swanson -- a board member at NextEra Energy (NEE) -- purchased almost 7,200 shares of the company's stock on Oct. 26 at an average price of $69.53 per share. This purchase roughly doubled Swanson's direct holdings of NextEra Energy stock to a total of 14,400 shares. NextEra, formerly known as Florida Power & Light, is primarily an electric utility that generates electricity from several sources, including fossil fuels, nuclear and renewable. Swanson also serves as CEO of Raytheon (RTN).

We like to track insider purchases, so this investment of a half-million dollars has gotten our attention. Logically, insiders should be reluctant to invest more money in the company, since a sizable portion of these folks' future incomes are generally tied to it already -- so it would be rational for an individual to diversify their market exposure. In theory, then, insider buying should be a particularly bullish sign, as it shows these insiders are very confident in the company's prospects. In fact, studies have shown this to be the case.

In the third quarter, NextEra's revenue fell 12% from the prior year. However, operating costs were also down, so earnings actually edged up 2%. This was not as successful as the first half of the year had been; compared to the same period in 2011, NextEra's sales declined 5%, but net income climbed 18%. The company is investing heavily in additional capacity -- its $3.2 billion in cash flow from operations, and a substantial issuance of long-term debt, were entirely consumed by the retirement of other debt and by $6.5 billion in cash used in investing activities. NextEra Energy shares trade at 14x earnings both on a trailing and forward basis. As an electric utility, it pays a dividend yield of 3.5%.

The second quarter saw some some interest from hedge funds in NextEra Energy -- and, of the funds and other notable investors tracked in our database, of 13F filingsthe largest position belonged to Adage Capital Management. This firm, which is managed by Phil Gross and Robert Atchinson, reported a position of 1.8 million shares. Billionaire Israel Englander's Millennium Management nearly tripled its stake in the company to a total of about 750,000 shares.

Other large electric utilities include Duke Energy (DUK), Southern (SO), American Electric Power (AEP) and FirstEnergy (FE). These peers pay dividends of between 4.2% and 4.8%, higher than that of Nextera. In terms of their recent business performance, American Electric Power and FirstEnergy reported considerably lower earnings in their most recent quarter vs. the prior year -- in fact, in the case of American Electric Power, profit declined by nearly half.

Duke and Southern, by contrast, saw small increases in net income -- ones that were roughly in line with Nextera's third-quarter growth rate. American Electric Power matches Nextera in terms of its pricing relative to its earnings, as it likewise carries both trailing and forward P/E multiples of 14x. The other three electric utilities trade at a premium, with prices at between 17x to 19x trailing earnings and 15x to 16x forward earnings. As utilities, all five of these companies have betas of 0.5 or less, and so they suffer little downside risk from a bear market.

Our view is that, if the higher dividend yields are important to investors, they should consider Duke or Southern as large-cap companies. These names sport stable earnings and good income potential. However, the best value does indeed seem to be Nextera -- so, especially given the recent insider buying, we think that it may be a good stock to consider.

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