Better Utility Stock: Constellation Energy vs. NextEra Energy

Investors are locking in on the utility sector, seeing it as a once-in-a-generation growth opportunity driven by surging electricity demand. The data centers that power modern artificial intelligence (AI) algorithms are a significant source of growing energy demand in the coming years. As a result, utility providers with substantial assets have become attractive stocks to play the AI energy boom.

Two top utility stocks investors may consider today are Constellation Energy (NASDAQ: CEG) and NextEra Energy (NYSE: NEE). Both utility stocks have different business models that cater to very different risk tolerances and investment styles. If you're weighing an investment between these two stocks, here's what you need to know today.

Image source: Getty Images.

Utilities are major providers of nuclear and renewable energy

Constellation Energy focuses on nuclear energy and is the largest nuclear power plant operator in the U.S. today. Its nuclear fleet can provide baseload, carbon-free power, which appeals to hyperscalers who need reliable energy 24/7. In recent years, the company has entered into power purchase agreements with Microsoft to restart Three Mile Island Unit 1 (now known as the Crane Clean Energy Center) and with Meta Platforms for nuclear energy from its Clinton Power Station in Illinois.

NextEra Energy's specialty is renewables, and it is the largest producer of wind and solar power in the U.S. as well as a leader in battery storage. The company also has nuclear plants in Florida, New Hampshire, and Wisconsin and has entered a 25-year agreement with Alphabet's Google to restart the Duane Arnold nuclear plant in Iowa.

The contrasting business models of Constellation Energy and NextEra Energy

Constellation Energy is an independent power producer, meaning it owns facilities that generate electricity and sells it through power purchase agreements (PPAs) to utilities or in spot markets at prevailing prices. This provides Constellation with higher upside when electricity prices rise. This is also known as a merchant model. But it also faces greater volatility, especially as regulators look to cap rising utility rates.

NextEra Energy operates more as a regulated utility provider with a strong emphasis on renewable energy, such as wind and solar power, and most of its earnings come from Florida Power & Light. As a regulated utility, the government oversees the rates that it can charge. This provides a floor for earnings and also offers it a stable, predictable income over time.

Which utility stock is right for you?

When choosing between the two stocks, consider your risk profile. For a more conservative investor, NextEra Energy's regulated utility model provides more stability over time. It's also a better stock for income investors; its dividend yield is 2.7%, and it has raised its payout for 32 consecutive years.

On the other hand, Constellation Energy offers investors upside potential from rising utility prices. Analysts project Constellation could grow its non-GAAP (generally accepted accounting principles) earnings per share by 25% and 17% over the next two years, while they project NextEra's EPS to grow at a steady 9% annually.

If you're seeking a defensive utility provider with a dividend that grows over time, NextEra Energy is for you. But if you are bullish on the AI infrastructure buildout and the energy required for data centers and don't mind taking on additional risk, Constellation Energy is a utility with more upside potential.

Courtney Carlsen has positions in Alphabet, Constellation Energy, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Constellation Energy, Meta Platforms, Microsoft, and NextEra Energy. The Motley Fool has a disclosure policy.