Down More Than 20% in a Week, This Elite Dividend Stock is Looking Like a Screaming Bargain

NextEra Energy (NEE -1.36%) has gotten bludgeoned by the market over the past week. Shares of the leading utility have crashed more than 20% on news that its renewable energy-focused subsidiary, NextEra Energy Partners (NEP -0.89%), was cutting its dividend growth rate by roughly half. The culprit is the impact of surging interest rates on its cost of capital. That headwind is making it too expensive to use debt and equity funding to close drop-down acquisitions from its parent. 

This issue is causing concerns that NextEra might be unable to deliver on its long-term growth plan. However, the company recently proved that it has other ways to recycle capital than selling assets to its affiliate. So the recent sell-off makes shares seem like a screaming bargain.

Slamming on the brakes and switching gears

NextEra Energy Partners recently caught investors off guard by revealing a significant change to its growth outlook. It slashed its projected dividend per share growth rate from an aggressive 12% to 15% annual target pace through 2026 to a much more moderate rate of 5% to 8% each year (with a target of 6%). 

That's more in line with its peers Brookfield Renewable (BEPC 0.09%) (BEP 0.19%) and Clearway Energy (CWEN 0.26%) (CWEN.A 0.28%). Brookfield's target is to grow its dividend by 5% to 9% annually over the long term, while Clearway targets dividend growth in the upper end of its 5% to 8% annual target range through 2026.

NextEra Energy Partners is also adjusting its expansion and financing strategy so that it's more in line with its peers. Instead of focusing on acquiring operating renewable energy assets from NextEra Energy, the partnership plans to invest in higher-return organic growth projects, like repowering the bulk of its wind farms by replacing aging turbines with larger, more powerful ones. It intends to finance those projects through capital recycling (it's selling its natural gas pipelines) and retained cash flow after paying dividends.

That's a similar approach to Brookfield and Clearway. Brookfield uses post-dividend free cash flow and capital recycling to fund development projects and acquisitions. Meanwhile, Clearway sold its thermal assets and is using the proceeds to fund new investments.

Looking elsewhere to recycle capital

NextEra Energy Partners had been a regular source of cash for NextEra Energy. The utility routinely dropped down sizable portfolios of income-producing renewable energy assets to its affiliate. Those deals provided the partnership with rapidly rising cash flows to increase its dividend at a brisk rate. Meanwhile, they allowed NextEra Energy to recycle that capital into its large pipeline of development projects.

However, drop-downs are only one of the ways it can recycle capital. The company recently demonstrated this by agreeing to sell Florida City Gas to Chesapeake Utilities Corporation (CPK -0.98%). That transaction values the gas utility at $923 million. CEO John Ketchum commented in the press release unveiling the deal that it "allows us to continue our strategy of redeploying capital into our core businesses." 

The sale won't negatively affect the company's growth plans. It still expects to grow its adjusted earnings per share by 6% to 8% annually through 2026. Further, the company noted that it would be disappointed if it didn't deliver earnings-per-share growth at or near the top end of that range. Powering that plan is its highly visible growth capital project backlog and ability to recycle capital as needed to help finance its expansion. 

Growth on sale

The sell-off in NextEra Energy's share price now has the utility trading at a much lower valuation. It currently fetches less than 17 times forward earnings, which is cheaper than rival Southern Company at more than 17 times earnings. While it's not quite as cheap as peers like Duke Energy (over 15 times forward PE) and Dominion (less than 13 times forward P/E), it currently trades at its lowest valuation in years (and nearly half its peak value from early 2022. 

NextEra Energy's plummeting share price has also driven up its dividend yield. It's currently around 3.6%, more than double the dividend yield of the S&P 500 (recently about 1.6%). While that's not as high as many of its rivals in the utility sector, it's the highest yield the company has offered investors in over a decade. The company still plans to increase its payout by around 10% annually through at least next year, continuing its multi-decade streak of sizable dividend increases. 

An overreaction

NextEra has gotten pummeled by news its partnership is slamming on the brakes, cutting its dividend growth target range in half while also shifting its expansion strategy from drop downs to organic investments. However, that shift probably won't affect NextEra's growth forecast, since it has other ways to recycle capital. The sell-off therefore makes shares of the renewable-energy juggernaut look like a screaming buy these days for investors seeking a top-notch dividend growth stock powered by renewables.