What happened
NextEra Energy Partners (NEP 2.83%) stock plunged 40.5% in September, according to data provided by S&P Global Market Intelligence. In an unexpected move, the renewable energy stock dramatically cut its dividend-growth outlook last month, leaving investors worried about the company’s growth prospects. The stock has continued its decline so far this month, and NextEra Energy Partners shares are now down a whopping 59% since September, as of this writing.
So what
Until August, NextEra Energy Partners was confident of growing its dividend payout by 12% to 15% through at least 2026, driven primarily by potential acquisitions from its parent company, NextEra Energy, and third parties.
In September though, NextEra Energy Partners slashed its dividend-growth outlook to 5% to 8%, with a target of 6% through at least 2026. CEO John Ketchum blamed a “tighter monetary policy and higher interest rates” as affecting the company’s financing need to grow its dividends.
NYSE: NEP
Key Data Points
In other words, high interest rates have made it costlier for companies to raise funds for growth. Since a limited partnership like NextEra Energy Partners also pays out almost 100% of its cash available for distribution as dividends, such companies often rely on debt and equity to raise funds. NextEra Energy Partners realized its previous growth target was unsustainable and was compelled to reduce it to levels that it believes it can mostly fund internally.
The announcement, of course, came as a huge blow to the markets, particularly to income investors who banked on NextEra Energy Partners’ dividends. With several analysts also slashing their price targets on NextEra Energy Partners, the stock plunged last month. Analysts from Wells Fargo, for instance, more than halved their price target on the stock to $33 per share from $80 a share.
Now what
By reducing its dividend-growth target, NextEra Energy Partners expects to focus on “higher-yielding growth opportunities” in the coming years. That includes plans to “repower” its wind assets, meaning it will replace or refurbish existing wind turbines with newer, more efficient ones. In between, NextEra Energy Partners will continue to acquire renewable assets from its parent company or third parties as has always been the case. Meanwhile, NextEra Energy Partners is sticking with its previous plan and will sell its natural gas pipeline assets to become a 100% renewables pure play.
Thanks to a lower dividend-growth target, renewed growth strategy, and its plans to divest natural gas assets, NextEra Energy Partners believes it will not have to raise fresh equity until 2027. That said, the company didn’t rule out the possibility of issuing equity when market conditions turn favorable.
It’s never easy for a company to cut its growth target. NextEra Energy Partners’ move may have caused short-term pain, but it could pay off in the long run. Given how far the stock has already fallen in recent weeks, opportunistic investors may even want to consider betting on NextEra Energy Partners stock now for the long term. Even a 6% annual-dividend raise, after all, is a good raise for income investors.
