NextEra Energy Partners‘ (NYSE: NEP) dividend yields currently over 14%. That is 10 times higher than the S&P 500‘S dividend yield. While a double-digit dividend yield may seem tempting, it is usually a signal that the market does not believe the current level of the payout is sustainable.
I agree with the market that this dividend shares renewable energy will eventually reduce his big payout. This is why I predict a dividend cut would occur within the next year.
No room for mistakes
NextEra Energy Partners currently believes that it will not only be able to maintain its dividend but also continue to increase her payments. The company aims to grow its payout by 5% to 8% annually through 2026, with a target of 6%. recently increased his payment by a further 1.4% compared to the previous quarter’s level, putting it 6% above the year-ago payment.
The company is pursuing a two-pronged strategy to achieve its dividend growth plan. It expects to produce 1.3 gigawatts (GW) of electricity wind energy redevelopment projects until 2026 Unpleasant organic increase her cash flow. These high-yield projects are seeing the company install larger wind turbines on existing wind farms that produce more power and cash flow. It has already secured almost 1.1 GW of these projects, putting it on track to meet its target.
The other aspect of the plan is to sell its natural gas pipeline businesses next year. Those sales will give it the means to repay maturing debt and acquire additional renewable energy assets. NextEra sold its STX Midstream business late last year for more than $1.8 billion. That sale will allow it to fund buyouts of upcoming debt repayments through June of next year. Meanwhile, the company plans to sell its Meade Pipeline business next year to fund additional buyouts and future renewable energy acquisitions.
NextEra Energy Partners has a strategy to continue growing its dividend while strengthening its financial position. However, the plan leaves no room for error. The company expects its dividend payout ratio to be in the mid-90s through 2026, which is extremely high. If the company hits an unexpected speed bump, it may have to cut its dividend to have more cash to fund future buyouts and acquisitions.
The cost of capital puzzle
Rising interest rates in recent years have made it more difficult for NextEra Energy Partners to refinance debt and finance acquisitions at attractive rates. capital costs. Interest rates are high, as is the dividend yield, making it too expensive to issue new debt and equity. So it has turned to asset sales and high-yield organic expansion projects to repay maturing financing and grow cash flow and dividends.
The company needs to improve costs of capital to get started a more sustainable foundation in the long term. That leads to View all options to address the situation. As the company’s CEO, John Ketchum, noted in his second quarter call that attracting private capital is a possible alternative that is being explored. A preferred stock investment or something like that would provide additional capital that the company could use to pay off future acquisitions and finance acquisitions.
The company may also have to reinstate its dividend as part of such an investment deal. Ketchum stated during the call that “the partnership’s 6% distribution growth target remains for now.” An analyst on the call noted that this last part is rather new language when talking about dividends.
The CEO seems to be provide hints to lay the foundation for a future payout reduction. Cutting the dividend would Certainly reduce the cost of capital, as the company can then use excess free cash flow at no cost to finance acquisitions and future repayments.
A dividend cut seems unavoidable
The market does not believe NextEra Energy Partners will be able to maintain its current dividend level for a lot of longer. I agree. I expect the The company will eventually cut the dividend to a much lower level (likely 50% or more below the current rate) to keep additional cash on hand to finance acquisitions and strengthen the balance sheet. Although painful at first, a reduction would allow the company to potential create more value for shareholders in the long term, as this should boost the share price and improve growth per share. Given the likelihood of a dividend cut, NextEra Energy Partners is not the best option for investors looking for a lucrative and sustainable income stream right now.
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Matt DiLallo has positions in NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Prediction: This Ultra-High Yield Stock Will Eventually Cut Its Dividend was originally published by The Motley Fool
