Shares of NextEra Energy Partners (NYSE: NEP) fell 8.7% in today’s trading on Monday.
The master limited partnership (MLP) focused on buying and holding renewable energy projects from the parent company NextEra Energy (NYSE: NO) fell after a Wall Street analyst downgraded the stock and lowered his price target.
Why? A possible cut to the company’s 13.8% dividend could be a possibility.
RBC predicts dividend cut for NextEra
In his note today, RBC Capital analyst Shelby Tucker downgraded NextEra Partners to market perform from outperform, while lowering his price target to $30 from $38.
Tucker now believes there aren’t enough cheaper wind repowering opportunities to grow NextEra’s earnings to its 5% to 8% target, and that the company may struggle to maintain that high of a dividend while also paying off billions in looming convertible equity portfolio financing (CEPF). These types of project financings have allowed NextEra to finance projects in a relatively cheap and flexible way, but NEP’s CEPF notes were sold when interest rates were much lower. After 2026, there will be $3.7 billion in looming principal payments to be paid off.
While NextEra has the time and options to pay down these obligations, the increased cost of capital since the CEPFs were sold means that it will be expensive for NextEra to refinance. So while management had considered private financing, Tucker thinks that continued higher interest rates will necessitate a cut in the company’s distribution. Tucker suspects that a 50% cut could be in the cards, and may even be prudent. That would take care of the CEPF financing and free the company from having to take on expensive debt or issue equity. Issuing equity would be painful, considering the shares are down 68% from their all-time high.
Be wary of MLPs that pay high dividends
Investors may have been tempted to buy NextEra in the past because of its generous and growing dividend. But the problem with these MLP models is that when interest rates or economic concerns arise and the stock price falls, the company can no longer issue shares to grow. Thus, the model becomes “stuck” and can result in painful dilution or cuts to what once seemed like a sweet dividend yield. That appears to be what is happening with NEP today.
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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
Why NextEra Energy Partners Collapsed Today was originally published by The Motley Fool
