Actions 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 utility. NextEra Energy (NYSE:NEE) fell after a Wall Street analyst downgraded the stock and reduced his price target.
Why? A possible 13.8% dividend cut could be on the cards.
RBC sees dividend cut for NextEra
In his note today, RBC Capital analyst Shelby Tucker downgraded his rating on NextEra Partners from “outperform” to “market perform,” cutting his price target from $38 to $30.
Tucker now believes there aren’t enough low-cost wind repowering opportunities to grow NextEra’s earnings to its 5% to 8% target, and that the company may struggle to keep the dividend that high while also paying off billions of dollars of impending convertible equity portfolio financing (CEPF) maturities. These types of project financings allowed NextEra to finance projects in a relatively flexible and low-cost manner, but NEP’s CEPF bonds were sold when interest rates were much lower. After 2026, there are $3.7 billion of impending maturities that will need to be paid.
While NextEra has time and options to pay down these liabilities, the rising cost of capital since the CEPFs were sold means it will be expensive for NextEra to refinance them. So while management had contemplated private financings, Tucker believes the higher interest rate environment that persists will require a cut in the company’s distribution. Tucker suspects a 50% cut could be in the plans, and might even be prudent. That would take care of the CEPFs’ funding and leave the company free from having to take on costly debt or issue equity. Issuing equity would be painful, as the stock is down 68% from its all-time highs.
Be wary 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 concerns about interest rates or the economy arise and the stock falls, the company can no longer issue shares to grow. Thus, the model “gets stuck” and can lead to painful dilution or cuts to what once seemed like an appetizing dividend yield. That appears to be what is happening with NEP today.
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Billy Duberstein and/or his clients have no positions in any of the stocks mentioned. The Motley Fool has positions in NextEra Energy and recommends it. The Motley Fool has a disclosure policy.
Why NextEra Energy Partners Plunged Today was originally published by The Motley Fool