NextEra Energy Partners (NEP -1.49%) is poised to take advantage of the increasingly important shift toward clean energy. That's great, but it isn't enough on its own to make the business a buy. Here are some pros and cons that you need to think about before buying NextEra Energy Partners.
1. Parental guidance
One of the most important things to consider here is the relationship between master limited partnership (MLP) NextEra Energy Partners and NextEra Energy (NEE 0.51%), its sponsor. Effectively, NextEra Energy created and runs NextEra Energy Partners to be a funding source. NextEra Energy builds renewable power assets and then sells them -- or drops them down, in industry lingo -- to NextEra Energy Partners. This can be a win-win scenario, so long as the parent in the relationship is large and financially strong -- which just so happens to be the case.
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In fact, NextEra Energy is the largest utility in the United States, via its Florida-based utility portfolio, and it has an incredible track record of dividend growth. Although things can always change, at this point in time it looks like NextEra Energy Partners has the backing of a dominant, industry-leading utility behind it.
2. Growth opportunity
As it turns out, 2020 was a pretty good year on this front, with NextEra Energy Partners buying 1.1 gigawatts' worth of renewable power projects from its parent. But that's just the beginning, since NextEra Energy has a backlog of around 13.5 gigawatts of renewable power projects that it is looking to build. So there are likely to be plenty more opportunities for drop-down sales to come.
Meanwhile, NextEra Energy Partners is also looking to branch out on its own. In 2020 it completed three organic projects, which means it now has two levers to pull on the growth front. While buying assets from parent NextEra Energy will probably remain the primary growth driver, it's nice to see that the MLP has other avenues to pursue growth.
3. Distribution growth
In 2020, NextEra Energy Partners increased its distribution by 15%. That's a big jump, driven by cash available for distribution growing a massive 40%. The partnership is currently projecting another year of strong distribution growth in 2021, targeting an increase between 12% and 15%. The best part of this, however, might be summed up in this quote from NextEra Energy's fourth-quarter 2020 earnings conference call: "NextEra Energy Partners achieved its distribution growth objectives while maintaining a trailing-12-month payout ratio in the high 60% range as of year-end 2020." Basically, there's plenty of room for distribution boosts here, even if NextEra Partners' projections for business growth don't pan out quite as well as hoped.
4. A hot commodity
That said, the market seems to be acutely aware of of NextEra Energy Partners growth potential. Case in point: The yield currently -- at a modest 3% or so -- is near the lowest levels in the partnership's history. The market has bid up the unit price to all-time highs. Much like with parent NextEra Energy, investors are paying up for quality here right now. This presents a major complication.
Data source: YCharts.
Investors looking for dividend growth will probably be attracted to NextEra Energy Partners. But those with a value bias or a desire to maximize their current income could probably be hesitant considering the current price tag. For dividend growth investors, meanwhile, it pays to step back and consider some things. For example, renewable power is a hot sector right now, but that increases the risk of less disciplined players showing up. In fact, Southern Company warned of just such a thing in 2019, a point in time when it pulled back from the space. In other words, a lot of the valuation here is tied up in the continuation of a trend that may be changing shape.
That's not meant to dissuade dividend growth investors from buying NextEra Energy Partners, given there are a lot of reasons to like the units. However, it is a warning that this isn't a "set it and forget it" investment, even with a strong parent like NextEra Energy. Recognize that you are paying up for growth and you need to make sure that you are being rewarded for it.
Not for everyone
At the end of the day, NextEra Energy Partners is doing very well and investors recognize that fact. That, in turn, means it isn't a great choice for all investors. Those with a value focus or a desire for large dividend yields will want to find other investment options. However, dividend growth investors will like what they see here. Just go in knowing that the price is steep and that there are some risks that need to be monitored.
