Energy companies have been reporting record profits in 2022, helped by inflation in the wake of the pandemic and years of underinvestment in infrastructure. Many of these companies have been reinvesting their windfall into new energy generation projects, renewable energy, and returning cash to shareholders via dividends and share repurchases.
NRG Energy (NRG 0.60%) has been doing the same. The utility company increased its dividend this year and announced a $1 billion share repurchase plan last December. But it just announced a new use for cash that investors were less than happy about: the acquisition of Vivint Smart Home (VVNT). What gives?
Another wild year for this energy stock
NRG is an integrated utility providing electricity and natural gas to customers primarily in Texas, California, and a handful of other states. The bulk of the company's power plants is in Texas. Remember winter storm Uri? NRG came under fire from many customers for failed utility services during that ugly winter of 2021.
Despite that massive electric grid disruption, NRG went on to have an otherwise solid 2021 for financial results, which carried over into the start of 2022. But the company got dinged again when a fire caused one of its coal plants in Texas to shut down. That facility is expected to be closed until the second quarter of 2023. Net income at NRG has suffered ever since as a result.
Data by YCharts.
Deepening ties to the customer
All of this is to provide a backdrop for the announced Vivint acquisition. Amid a fast-changing economy and consumer trends, NRG laid out a new strategy at its 2021 investor day. Because of the proliferation of mobile devices and the coming wave of electric vehicle adoption, NRG sees growth opportunities for a consumer-facing utility like itself. Specifically, it said it wanted to deepen ties with households by offering not just energy services but also digitally enhanced smart-home services that help consumers manage their day-to-day lives.
Thus, it may not be completely surprising that NRG announced the acquisition of Vivint Smart Home. Vivint serves nearly two million households with products and services spanning smart locks and security surveillance systems, garage door controls, smart lighting and thermostats, and the like. It also offers solar panels through Vivint Energy, though it sold its solar business to Sunrun (SUN 0.72%) back in 2020.
Why the market wasn't happy
Shares of NRG have fallen some 20% since the company made known its intention to buy Vivint. The all-cash price tag of $2.8 billion is only part of the reason why. NRG had just $333 million in cash and short-term equivalents at the end of September 2022, so it will need to raise new debt (total debt stood at just shy of $8 billion as of the last report) to take over Vivint. Additionally, Vivint itself had $2.4 billion in indebtedness, which will now become NRG's liability.
NRG said it thinks adding Vivint into the mix will increase annual adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) by $835 million. However, on an unadjusted basis, Vivint still reports a net loss ($41 million in net losses in the third quarter of 2022, to be exact). Free cash flow was just $12.9 million last quarter on sales of $439 million. All of this comes at a time when NRG's own profits are under pressure because of that coal plant outage.
After this unlikely tie-up between a utility and a smart home company, I'd be a bit hesitant to buy NRG stock -- and especially for the current dividend yield of 4.3%. Don't get me wrong, computing technology and electric vehicles are changing the way energy is used, and new energy generation tech will surely play a part in meeting demand. Perhaps NRG's purchase will be a highly prescient move in hindsight. But the market is calling this a high-risk move for a reason and punishing NRG's stock in response. I believe there are better utility, renewable energy, and smart home stocks out there right now.
