What happened
Shares of renewable energy asset owner NextEra Energy Partners (NEP -0.89%) plunged by as much as 18.4% in early trading on Monday after an analyst downgraded the stock and rates on U.S. Treasuries rose. Shares were still down 13.7% for the day at 12:35 p.m. ET.
So what
Wells Fargo analyst Neil Kalton downgraded NextEra Energy Partners from overweight to equal weight and sliced his price target on the stock from $80 per share to $33 per share.
It didn't help that 10-year U.S. Treasury rates rose by 12 basis points in early trading to 4.69%. Higher Treasury rates make it more costly for companies to refinance debt.
The downgrade followed an announcement last week that NextEra Energy Partners had reduced its expected dividend growth rate from a range of 12% to 15% per year through 2027 to a range of 5% to 8%, with a target of 6%. Slowing its payout growth will give the company more financial flexibility and allow it to make more investments in higher-yielding projects short term.
Now what
A change in the forecast trajectory of a dividend is always a shock to income investors, but this one has been coming for a long time. Rising interest rates make it more expensive to finance renewable energy projects with debt, and rates have been rising for more than a year.
Many companies that rely on financing are going to have to adjust expectations as they use less debt or change their acquisition trajectories, and I think that's exactly what we're seeing here. The good news is the yield, based on its Q4 2023 distribution guidance of $3.52 per share and the current stock price, is now 13.7%. If yields remain high, NextEra Energy Partners could be a great buy-and-hold stock.
