Today, a large, unusual number of long-dated call options were traded in NextEra Energy (NEE), highlighting the stock's long-term bullish outlook. Management said it will hike the dividend by 10% annually for the next two years.
NEE stock is trading at $69.64, off its high of $78.67 on Nov. 29, 2024. This is up from a recent trough price of $66.96 on Jan. 13, just before its recent earnings release.
The Florida-based utility, which has a massive $143 billion market cap, announced strong earnings on Jan. 24.
Investors saw something in the recent announcement that made them buy huge, unusual amounts of call options. These calls expire in two years at an exercise price close to today's price (i.e., an at-the-market or ATM exercise price).
Unusual Call Options Activity
The reason is likely that NextEra Energy, which bills itself as America's largest electric utility and the world's largest generator of renewable energy from the wind and sun, gave guidance on its future dividend increases.
But first, let's look at the unusual call option activity. This can be seen in today's Barchart Unusual Stock Options Activity Report.
It shows that call options volume for the period ending Jan. 15, 2027, had over 4,600 contracts traded. That period is 702 days from now, or 1.92 years from now.
Note that the exercise price is at $70.00, which is only slightly over today's trading price. That means that the investor believes that the stock is likely to rise significantly from here. They are willing to pay $10.30 at the midprice of the premium to buy those calls.
In other words, their breakeven price is $70+$10.30, or $80.30, or about 15% higher than today's price. That means they can expect to see NEE stock well over $80.30, or much higher than a gain of 15% over the next 2 years.
Why would they do this in such a large, unusual volume? Let's see what the company said about its dividends.
NEE's Dividend Hike Guidance
Here is what management said in its press release about its future dividends:
“ NextEra Energy also continues to expect to grow its dividends per share at a roughly 10% rate per year through at least 2026, off a 2024 base.”
Here is what this means. NextEra has paid 4 quarterly dividend per share (DPS) amounts of 51.5 cents (i.e., $2.06 DPS annually) and it is likely to soon announce a new dividend hike. That is probably going to happen close to the end of this month, as it did last year.
What This Means for NEE Stock
So, for example, a 10% dividend hike would put the annual DPS at 56.65 cents, i.e., $2.266 annually. So at today's price of $69.64, the annual “forward” yield is:
$2.226 DPS / $69.64 = 0.032539 = 3.254% annually
However, since the investor in these call options will likely hold these securities over one year, they could expect to see another 10% hike in the dividend:
$2.226 x 1.10 = $2.4486 DPS
$2.4486 / $69.64 = 0.03516 = 3.516% DY
This shows that a long-term investor could expect to see a 3.51% dividend yield if the stock stays flat.
Morningstar reports that the trailing 12-month (TTM) dividend yield for NEE stock has been 2.93%. Therefore, in 2 years, NEE stock could be worth much more:
$2.4486 / 0.0293 = $83.57 per share
Moreover, Morningstar reports that over the past 5 years, its average yield has been much lower at 2.19%. Similarly, Seeking Alpha reports that the average 4-year yield has been 2.35%.
That implies NEE stock could be worth much more:
$2.4486 / 0.0235 = $104.20 per share
So, now these call options buyers can reasonably expect to see NEE stock rise almost 35% to $93.89 (the average of $83.57 and $104.20).
Long-Dated Call Options Buyers Expected Return (ER)
As a result, the expected return (ER) for these call options buyers is very high. For example, if NEE rises to $93.89 sometime in the next two years, the intrinsic value of these would rise to $23.89.
$93.89 - $70.00 = $23.89 per call option
That is over double the price paid for these calls:
$23.89 / $10.30 = 2.319 = 132% expected return
This 132% expected return on investment is much higher than just holding the stock by buying at today's price:
$93.89 / $69.64 = 1.3482 = 34.8% ER
In other words, based on the company's guidance, and assuming NEE stock trades at an average yield between 2.93% and 2.35% sometime in the next two years, the call option buyer has an expected return of 3 times (132% / 34.82% = 3.78x) than just owning the stock.
That is likely why there is a huge, unusual volume in these long-dated call options in NEE stock today.
Warning. Don't expect that this ER will necessarily happen. You could also expect to lose all of your money. For example, If NEE stock stays flat over the next two years, these call options will turn out to be worthless.
In that regard, you should be careful to not overdo things in following these institutional investors in this trade. This is not personal finance advice. You should consult your own advisors for your particular situation whether you want to copy this trade.
