What happened
After falling by double-digit percentages in the last week of September, shares of NextEra Energy (NEE +0.54%) extended their declines this week and were trading 13% lower through 1:20 p.m. ET Friday, according to data provided by S&P Global Market Intelligence. The stock, in fact, has now fallen to levels last seen in early 2020.
With more and more analysts becoming cautious about the utility stock's prospects after last month's unexpected developments, investors are increasingly growing wary, too.
So what
Several analysts downgraded their ratings and price targets on NextEra Energy stock this week.
Bank of America's Julien Dumoulin-Smith slashed his price target on NextEra Energy shares to $53 per share from $76 a share, citing interest rate pressures, among other things. KeyBanc analyst Sophie Karp cut her rating on the stock from overweight to sector weight and withdrew her earlier price target of $85 a share.
NYSE: NEE
Key Data Points
Utility stocks across the board have taken a beating in recent weeks, especially after the yields on Treasuries skyrocketed. Investors typically dump dividend-paying stocks when they can achieve similar returns with risk-free Treasuries. With interest rates also persistently high, investors are worried about the lingering cost pressure on utilities. In NextEra Energy's case, though, there's more to the stock's dramatic decline than interest rate fears.
Just days ago, NextEra Energy's wholly owned subsidiary, NextEra Energy Partners, slashed its annual dividend growth guidance to 5% to 8% through 2026. Until August, management was still expressing confidence that it would be able to boost the dividend by 12% to 15% every year in the coming years. Management blamed higher interest rates for the downgraded outlook, stating that it was becoming increasingly difficult for the company to fund its payout growth.
At the same time, NextEra Energy Partners also hinted at a change in its business strategy that could mean fewer drop-down transactions with the parent. NextEra Energy Partners typically acquires renewable energy assets from its parent to grow.
These developments may not bode well for NextEra Energy, as those drop-down transactions provide an important source of funds for the company. A dividend growth cut by its subsidiary will also mean lower extra income for NextEra Energy.
Now what
For now, NextEra Energy is sticking by its long-term guidance, saying it expects to grow its dividend per share by roughly 10% per year through at least 2024 off of its 2022 base.
Most analysts, however, are questioning the company's ability to meet that goal, especially after its subsidiary slashed its own growth targets because of high interest rates. That said, the sell-off in NextEra Energy stock may already be overdone.
