The big theme in the global power market is the shift away from carbon fuels, putting NextEra Energy Partners (NEP -4.72%) in a great position to grow its clean energy-focused business. But Wall Street is pretty good at discounting the future, which helps explain the somewhat modest 3.7% distribution yield. Is that enough enticement to make NextEra Energy Partners worth buying?
The NextEra Partners backstory
NextEra Energy Partners is a master limited partnership controlled by U.S. utility giant NextEra Energy (NEE -0.84%). It owns a portfolio of eight natural gas pipelines, but its real focus is on owning renewable power assets like solar and wind farms. The partnership's 5.3 gigawatt renewable portfolio includes 4.6 gigawatts of wind power and 750 megawatts of solar. Meanwhile, the average contract length with its 50 or so customers is 15 years, providing plenty of consistency to the top line.
Growth is expected to come via acquisitions, which is far less complicated than it might at first sound. That's because its parent company is using NextEra Energy Partners as a funding source, selling completed assets to the partnership to fund its own growth-spending plans. That creates something of a virtuous circle, since the cash effectively means parent NextEra Energy gets to build more clean energy projects that it can eventually pass down to NextEra Energy Partners. NextEra Energy has a backlog of 15 gigawatts of projects it hopes to build over the next couple of years.
NextEra Energy Partners, meanwhile, comes up with the cash to buy these assets via a mixture of debt and unit sales. Since the partnership's IPO in 2014, long-term debt has roughly doubled, and the unit count has increased by over 350%. While that seems material, it is buying cash-generating assets that allow it to increase its distribution. That payment started at $0.1875 per share per quarter in 2014, and has grown to $0.595 per share in the fourth quarter of 2020.
The partnership pegs the payout ratio at a reasonable 70% or so using trailing 12-month distributions. Moreover, it expects to grow its distribution by 12% to 14% a year through 2024 based on its current portfolio and expected dropdowns (industry lingo for NextEra Energy Partners buying assets from its parent).
An attractive business, but at what price?
At this point, NextEra Energy Partners sounds like a pretty attractive option for investors looking to put money to work in the renewable power space. And it likely is, if you have a dividend-growth focus. However, the 3.7% yield, while large relative to the 1.7% you'd get from an S&P 500 Index fund, isn't exactly huge. In fact, the yield is toward the low end of the partnership's historical yield range.
That fact should cause value-conscious investors and those looking to maximize their current income to pause. NextEra Energy Partners' price to sales ratio, price to book value ratio, and price to cash flow ratio are all near the highest levels in the partnership's history. As the relatively low yield suggests, this is not a partnership that's trading cheaply today. That said, there aren't a lot of well-positioned renewable power stocks that are cheap. For example, Brookfield Renewable Partners yields even less at just 2.9%. And while Clearway Energy yields a more generous 4.3%, it was forced to cut its dividend when a major customer declared bankruptcy. It's only just getting the dividend back on track.
At the end of the day, income-focused investors can find better yields elsewhere. And that might include looking outside the renewable power niche at companies that combine renewable power with another business -- for example, 7.4%-yielding energy giant Total, which is looking to use its carbon-based operations to fund investments in clean energy. So the real question with NextEra Energy Partners is probably whether or not you are willing to pay up for the opportunity to own a pure-play clean energy investment.
A tough call
NextEra Energy Partners has a very clear growth path ahead of it as its parent, NextEra Energy, continues to build out a backlog of renewable power investments. But Wall Street is well aware of this fact and has priced in the potential here, pushing the yield down to relatively low levels. Dividend growth investors will clearly be interested, but those in search of big yields will have to think a bit more about owning the partnership.
If you definitely want to own a focused renewable power investment right now, NextEra Energy Partners is probably a decent option. But if you can wait, you might want to keep this partnership on your watch list just in case investors turn negative on the space and push the yield up again. The yield has fairly frequently gone above 4% (which would require just a high-single-digit unit price decline from recent levels), with a couple of spikes to 5% or more (which would require a more material 25% price decline).