Actions of NextEra Energy Partners (NYSE:NEP) fell on Monday, down 8.7% in today’s trading.
THE Master Limited Partnership (MLP) focuses on purchasing and owning renewable energy projects from the parent company NextEra Energy (NYSE:NO) was down after a Wall Street analyst downgraded the stock and lowered his price target.
Why? A potential 13.8% dividend cut from the company could be considered.
RBC predicts NextEra dividend cut
In his note today, RBC Capital analyst Shelby Tucker downgraded his rating on NextEra Partners from outperform to market perform, reducing his price target from $38 to $30.
Tucker now believes there aren’t enough lower-cost wind repowering opportunities to grow NextEra’s earnings to its 5% to 8% target, and that the company may struggle to maintain such a high dividend while repaying billions of dollars in looming convertible equity portfolio financing (CEPF) maturities. These types of project financings have allowed NextEra to fund projects relatively cheaply and flexibly, but NEP’s CEPF bonds were sold when interest rates were much lower. After 2026, $3.7 billion of looming maturities will need to be repaid.
While NextEra has the time and means to repay these debts, the increased cost of capital since the sale of the CEPFs means that it will be expensive for NextEra to refinance them. So while management had considered private financings, Tucker believes that the continued high interest rate environment will require a reduction in the company’s distributions. Tucker believes a 50% reduction could be possible, and may even be prudent. This would address the CEPF financing while freeing the company from having to take on expensive debt or issue equity. Issuing equity would be painful, with the stock down 68% from its all-time highs.
Beware of MLPs That Pay High Dividends
Investors may have been tempted to buy NextEra in the past because of its large and growing dividend. But the problem with these MLP models is that when interest rates or economic concerns hit and the stock falls, the company can no longer issue shares to grow. So the model gets “stuck” and can lead to painful dilution or writedowns of what once seemed like a compelling product. dividend yieldThis seems to be what is happening with the NEP today.
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Billy Duberstein and/or its clients have no position in any of the stocks mentioned. The Motley Fool has a position in NextEra Energy and recommends NextEra Energy. The Motley Fool has a disclosure policy.
Why NextEra Energy Partners Plunged Today was originally published by The Motley Fool
