NextEra Energy Partners (NEP), under the stock ticker NEP on the NYSE, currently presents a highly attractive dividend yield, exceeding 14%. This is significantly more than ten times the average dividend yield offered by the S&P 500. Adding to its appeal, this renewable energy company has signaled intentions to continue its dividend growth trajectory for at least the foreseeable future.
However, the exceptionally high dividend yield of Nextera Energy Partners Stock isn’t without cause. There’s a palpable concern within financial circles that the company might be compelled to reduce its substantial payout down the line. Let’s delve into the factors that might make investors cautious about putting their money into Nextera Energy Partners stock right now.
Understanding the Financial Challenges Facing NextEra Energy Partners
Recent years have seen NextEra Energy adjusting its strategic growth plans, largely triggered by the sharp increase in interest rates. The elevated interest rate environment has pushed the company’s cost of capital upwards, making it less viable to refinance existing debt or secure new capital for expansion at favorable terms. This shift has necessitated a re-evaluation of their operational strategies.
A significant strategic pivot was announced in May 2023, marking a move towards becoming a pure-play renewable energy entity. This involves divesting its natural gas pipeline assets in a phased manner. The capital raised from these sales is earmarked to fund the planned buyouts of its convertible equity portfolio financings over the coming years. A concrete step in this direction was the sale of STX Midstream to Kinder Morgan, which generated $1.8 billion. This inflow of funds is set to cover a significant portion of the equity buyouts related to convertible equity portfolio financings due up to 2026. Looking ahead, the company intends to sell Meade Pipeline in the subsequent year. The proceeds from this sale will be channeled towards further buyouts and to finance fresh investments in renewable energy projects.
The company’s strategy underwent a second notable change a few months later with a revision in dividend growth expectations. The projected annual dividend growth rate was adjusted downwards from an ambitious 12%-15% through 2026 to a more modest 5%-8%, targeting around 6% growth per year within this period. Furthermore, the primary engine for growth transitioned from acquisitions to reinvesting in existing wind farm assets. This involves upgrading older turbines with newer, more powerful models capable of generating increased energy output.
The concerns surrounding NextEra Energy Partners’ revised strategy are twofold. Firstly, the company anticipates its dividend payout ratio to hover around the mid-90s percentile until 2026. Such a high payout ratio offers minimal buffer for unforeseen financial headwinds. Secondly, the company will require additional equity capital in 2027 to sustain its portfolio expansion and dividend commitments. Should its cost of capital remain elevated, a potential reduction in dividend payouts might become necessary in the near future to fuel growth.
Dividend Growth Revision and Payout Concerns
NextEra Energy Partners is actively exploring various avenues to mitigate the challenges posed by its increased cost of capital and the outstanding convertible equity portfolio financing buyouts. While the current outlook suggests a continued dividend growth of approximately 6% annually, adjustments to this plan might be required. An equity infusion appears to be a likely prerequisite to strengthen the balance sheet and secure funding for future expansion. Market analysts suggest that a dividend payment reduction before 2027 is plausible, potentially in the range of 50%.
For investors primarily focused on consistent income generation, a 50% dividend cut might seem like an unfavorable scenario. However, even after such a reduction, an investment made at the current price could still yield around 7%, which remains significantly above average.
The Potential Upside and Stock Recovery for NEP
Despite the concerns, there’s a considerable potential for Nextera Energy Partners stock price appreciation as the company works towards solidifying its financial footing and funding mechanisms. The stock price of Nextera Energy Partners has experienced a significant downturn, plummeting over 70% since its financial challenges surfaced a few years prior. This decline occurred despite consistent growth in both dividend payments and earnings, underpinned by a substantial and expanding portfolio of high-quality, long-term contracted clean energy assets. These assets are pivotal in the transition towards a lower-carbon economy. Moreover, NextEra Energy Partners is poised to play a crucial role in expanding the nation’s renewable energy capacity by acquiring income-generating renewable energy projects from developers, including its parent company, NextEra Energy. This process allows these developers to recycle capital into new development ventures.
Should NextEra Energy Partners successfully re-establish a trajectory of earnings and dividend growth, supported by a more sustainable funding model, its stock price is expected to embark on a recovery path. The company possesses substantial long-term growth prospects, driven by the immense and ever-increasing demand for clean energy infrastructure in the future.
A High-Risk, High-Reward Opportunity
Investors primarily seeking reliable and sustainable income streams might find it prudent to steer clear of Nextera Energy Partners stock for the time being, given the realistic possibility of a dividend cut. However, for those willing to navigate this risk, the potential upside is quite compelling. Once NextEra Energy Partners establishes a more robust financial base, it holds the promise of generating significant total returns in the years ahead, fueled by both stock price recovery and the expansion of its portfolio of income-producing renewable energy assets.
