At the end of September, one of my favorite energy dividend stocks announced a whopping 50% cut to their forecast dividend growth rate.
Unsurprisingly, the stock tanked by almost 60% over the next few weeks. But look beyond the headlines, and this dividend “disaster” is actually a huge opportunity. I’m talking a double or even triple. Not to mention the dividends you get while you wait. Let me explain…
NextEra Energy Partners (NEP) is a “yieldco” type of company that owns renewable energy production assets with the output sold on long-term contracts. NEP has been a high dividend growth rate stock. Since its July 2014 IPO, the dividend has increased every quarter, producing almost 15% compound payout growth. With its second-quarter earnings release, the company reiterated its forecast of 12% to 15% distribution growth through 2026.
What changed?
Large-cap ($140 billion market cap) public utility NextEra Energy (NEE) is the sponsor company of NextEra Energy Partners. As the sponsor, NEE develops or acquires renewable energy assets, which are then sold to NEP at prices that allow the NEP dividend rate to continue growing. NextEra Energy had been highly supportive of NextEra Energy Partners’ investors and the company’s prospects to sustain its dividend growth goals.
On September 27, NextEra Energy presented at the Wolfe Research Utilities, Midstream & Clean Energy Conference. The presentation slides show the changes planned for the NEP business and dividends:
According to the presentation, NextEra Energy Partners revised its long-term growth rate to reduce financing needs and better position the partnership to continue to deliver long-term value for unitholders:
The company revised its 2023 expected adjusted EBITDA to $1.9 to $2.1 billion, compared to $2.22 to $2.42 billion estimated in the second quarter earnings release. Revised cash available for distribution declined to $730 to $820 million, compared to the previous $770 to $860 million.
In the presentation, NextEra Energy Partners forecast its dividend rate would be at an annualized $3.52 per share rate by the end of 2023.
The point that no growth equity will be needed until 2027 may be the most crucial fact. A need to issue equity at the current very high yield on shares would not work.
The August dividend annualizes to $3.42 per share. A little math gives a two-cent increase for the next dividend announcement in November. Using the $3.52 annual dividend expectation and the current $20.60 per share price, NEP yields 17%. The shares are grossly oversold.
I suspect that uninformed investors believed that the dividend rate itself would be cut. Once the selling started, the fear took over, and it has been a brutal 50%-plus drop in a few weeks.
Rising interest rates have put a big question mark on the viability of continued investment in wind and solar renewable energy projects. The industry faces significant challenges, and I think, in hindsight, the growth forecast reduction will prove to be a good move by NextEra Energy Partners.
The overwatch and support by NextEra Energy can give investors confidence that NextEra Energy Partners is backed by one of the best-run public utilities.
After the recent stock crash, NEP looks highly speculative. Because of the reasons given here, the share price will likely provide a nice double to triple over the next couple of years. And you get paid a growing dividend along the way.To get a list of my favorite high-yield investments, join The Dividend Hunter – click the link below to see how.
