One of my latest buys was renewable energy yieldco NextEra Energy Partners (NEP 7.94%). I bought my first 10 shares, which cost less than $500. Here's what I like about the clean energy-focused company.
NextEra Energy Partners 101
NextEra Energy Partners is an affiliate of leading electric utility NextEra Energy (NEE 1.13%). The partnership focuses on owning and operating clean energy assets (natural gas pipelines as well as wind and solar power generating facilities) in the U.S. that produce stable income backed long-term, fixed-rate contracts with customers.
The company distributes the bulk of the cash flow those assets produce to investors via its dividend, -- which currently yields about 5% -- with it aiming for a mid-70% payout ratio this year. It retains the rest to expand its existing gas pipelines and repower older wind farms.
In addition to those organic expansion projects, NextEra Energy Partners has been an active acquirer over the years. It made two large-scale transactions last year, buying a gas pipeline from a third party and a portfolio of wind and solar facilities from NextEra Energy.
Financing those deals took some creativity because it pays out such a large portion of its cash flow via the dividend and doesn't have an investment-grade rated balance sheet. The company worked around those issues by securing convertible equity portfolio financing arrangements with private capital providers KKR and Blackrock. It can eventually buy out this low-cost financing with cash or newly issued shares.
A look at what's ahead for NextEra Energy Partners
NextEra Energy Partners anticipates that it can grow its high-yielding dividend by about 12% to 15% per year through 2024. It already has enough power to support this year's increase thanks to the acquisitions it made last year. Meanwhile, it has plenty of fuel sources to deliver on its longer-term target, given the extensive portfolio of clean energy assets owned by NextEra Energy that it could acquire in the future.
The only thing standing between the company and its ability to deliver on its ambitious dividend growth goal is financing. That's somewhat concerning given the current state of the economy over the COVID-19 outbreak. With economic conditions weakening, it will be harder for NextEra Energy to obtain the outside funding it will need to complete more acquisitions, especially given all the volatility in the market, which has weighed on the company's share price. NextEra Energy Partners thus might not be able to grow its dividend as fast as it expected in the coming years.
Delivering slower dividend growth might not be a bad idea. That's because it would enable the company to retain more cash that it could use to bolster its balance sheet or start redeeming some of those convertible equity financing arrangements. Doing so would put it in a better position to grow once market conditions improve.
While I like the dividend, the main reason I bought shares is that it provides me with another way to participate in the long-term growth of the renewables industry. The company and its parent expect renewable power generating capacity in the U.S. to grow at a 15% compound annual rate through 2030. That should provide the company with plenty of opportunities to expand its portfolio of cash-flowing clean energy assets, which should give it the power to grow its dividend in the years to come even if it needed to take a near-term breather.
Taking advantage of the opportunity
I've had NextEra Energy Partners on my watchlist for quite a while. With its shares selling off over the COVID-19 outbreak, I decided to finally add some to my portfolio. Hopefully, this purchase, along with others I'm making in my renewable energy basket, will help power a comfortable retirement.