Growing use of renewable energy is an undisputed trend that's here to stay. The U.S. Energy Information Administration expects that the share of renewable sources in the U.S. power-generation sector will more than double by 2050. Let's look at why NextEra Energy Partners (NEP 1.41%) looks set to benefit from this expected growth.
NextEra Energy Partners' steady growth
NextEra Energy Partners owns and operates clean energy projects in the U.S. A subsidiary of NextEra Energy, NextEra Energy Partners grew its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by more than 16% year over year in the first quarter. The growth was primarily driven by contributions from new projects.
Based on the strong performance, NextEra Energy Partners raised its per-unit distribution by nearly 15% over the year-ago quarter. The distribution grew 3.5% sequentially.
Image source: NextEra Energy Partners.
The above chart highlights some unique features of NextEra Energy Partners' stock, compared to the S&P 1000 companies. Of the S&P 1000 companies, NextEra Energy Partners is among the eight companies with a debt-to-EBITDA ratio below 5, a dividend yield of more than 2.5%, and dividend-per-share growth of more than 60% for the past five years.
The debt-to-EBITDA ratio shows how many years it will take for a company to pay down its debt using its EBITDA, assuming both remain constant. A lower ratio is considered better.
Further, based on consensus estimates, NextEra Energy Partners is one of the two stocks out of the S&P 1000 stocks with compound annual dividend per-share growth expectations of higher than 12% between 2018 to 2023. Moreover, it expects 12% to 15% distribution growth through 2024.
When you consider that the distribution yield is around 3%, the expected growth offers an annual total return potential of 15% to 18%. This assumes that the stock's price will rise in line with the distribution growth, resulting in a stable average yield of around 3%, despite the distribution growth.
As of this writing, NextEra Energy Partners' stock is trading at a yield of nearly 4%, around 35 basis points higher than its five-year average yield. The company has grown its per-unit distribution by more than 290% since its listing in 2014.
Stock to benefit from long-term renewable-demand growth
NextEra Energy Partners has a portfolio of around 8 gigawatts (GW) of renewable energy projects. By comparison, parent NextEra Energy's renewable energy business, NextEra Energy Resources (NEER), has a capacity of around 31 GW, excluding backlog and growth projects.
Image source: NextEra Energy Partners.
There is around 170 GW of installed renewable energy capacity in the U.S., excluding NEER's capacity. The company expects this could grow to around 330 GW by 2024 and 540 GW by 2030. Meanwhile, the renewables penetration in the U.S. could grow to around 40% in 2030 from just 9% in 2019.
NextEra Energy Partners is well-placed to benefit from this expected growth. Overall, the company's consistent growth over the years, leading position in the renewable energy market, solid growth expectations, and extremely attractive dividend yield makes its stock appealing. The expected long-term growth in renewables means that NextEra Energy Partners stock can power your portfolio for decades to come.
