When inflation is high, businesses have to pay more to produce the goods and services they sell. This leaves them facing a dilemma.

They can either fix the prices they charge their customers, which means they’ll make less profit. Or they can increase their prices and risk losing business.

I have a renewable energy stock in my portfolio that I think is well-protected against this inflation dilemma. The stock is NextEra Energy (NYSE:NEE).

NextEra Energy

NextEra is a utilities company based in Florida. The company has two main operations — a regulated utilities business and a renewable energy business.

The regulated utilities business makes up around 80% of NextEra’s overall revenues. It’s this part of the business that I think is protected against inflation.

The business is protected from competition in that it has a legal monopoly in the areas to which it provides electricity, meaning customers can’t easily change to another supplier.

In exchange for this protection from competition, regulators limit the amount of profit NextEra can make by charging its customers. Currently, the business is allowed to make a 10.6% return on its assets.

Importantly, though, NextEra is allowed to make that 10.6% return if its costs increase. In other words, if inflation makes NextEra more expensive to run — which seems likely to me — then it can increase its prices to customers to compensate for this.

As a result, I’m not concerned about the impact of inflation on NextEra’s business. Utilities tend to enjoy steady demand and NextEra’s regulatory protection should allow it to make money consistently, even if high inflation persists.

A buying opportunity

I own NextEra shares in my portfolio. I also think that now might be an attractive time to add more.

The stock isn’t especially cheap, trading at around 23 times next year’s anticipated earnings. To my mind, the biggest risk from an investment perspective is that valuation.

As I see it though, the company’s premium valuation is justified by the advantages it has over its competitors. Being one of the first companies to make substantial investments into renewables infrastructure has allowed NextEra to occupy some of the best sites for generating wind and solar energy in the US.

This kind of advantage is virtually impossible to replicate. Over time, I think it will prove to be extremely important.

Right now, oil prices are high as a result of supply shortages brought on by the Russian invasion of Ukraine. As a result, oil stocks are doing well as the outlook for oil seems positive.

While the broader market is looking at fossil fuels, I’m looking at the renewables sector. High oil prices mean that oil stocks should do well in the near future, but with my focus further into the future, I’m looking at companies that will be part of the energy chain for a long time to come.

Since I think that NextEra is one of the best renewable energy stocks around and will be for some time, I’m happy buying shares for my portfolio here.

The stock is NextEra Energy (NYSE:NEE). Let’s get it clear at the outset — the stock is expensive. It trades at a price-to-earnings (P/E) of around 45, which is high compared to the S&P 500 average and other utilities companies such as Dominion Energy and Sempra Energy. The high price represents a risk, but I think that the quality of its operations justifies its price tag.

The company has two parts to it. It has a regulated utilities business and a clean energy division. NextEra generates cash using its regulated operations, which it then invests using its renewables organisation. Its regulated utilities are among the best in the business and its renewables segment is the largest producer of wind and solar energy on the planet.

NextEra’s regulated utilities

Utilities like NextEra have protected, monopolistic status. In exchange, the amount that they can charge customers is regulated. The company’s asset base, multiplied by an allowed rate of return, plus its operational expenses, provides the amount the company can charge customers. The key is the allowed rate of return. This is determined by the regulator and it establishes the company’s net income.

Florida Power & Light (NextEra’s regulated utility) has an allowed rate of return of around 10.6%. This is unusually high, but there are two reasons for this. One is that the Florida authorities tend to be constructive in working with utilities companies. The second is that it’s one of the best utilities companies around.

NextEra’s regulated utilities business has consistently reduced costs to consumers and has an enviable record of providing power consistently, even during Florida’s hurricane season. As a result, it attracts favourable treatment from regulators and generates a steady stream of cash to invest in renewable energy projects.

Renewable energy

The regulated side of NextEra’s business is a bit like Berkshire Hathaway’s insurance operations. Its function is to generate cash that the company’s renewables division — NextEra Energy Resources — can deploy elsewhere. NextEra Energy Resources develops renewable energy assets and sells the energy that it produces. 

As an early adopter of renewable energy — especially from wind — it has established projects in some of the best geographic locations for both wind and solar generation. This gives the company a huge competitive advantage. The company sells the power it generates via contracts that last for decades, often with built-in price increases. 

Conclusion

I think that NextEra Energy is an amazing investment opportunity. Structurally, I think the company resembles Berkshire Hathaway, which is clearly a successful model. Add to this the company’s outstanding operations and the enviable quality of its assets and I’m happy buying shares for my portfolio today. I see this as a company in excellent shape to provide substantial returns over a long period of time.