Shares of NextEra Energy Partners (NEP 1.88%) tumbled Monday morning and were trading 5.5% lower as of 10:45 a.m. ET. The renewable energy company announced its fourth-quarter earnings on Jan. 25, and while management reiterated its dividend growth goal through 2026, interest rates significantly influence the company's growth. Based on Monday morning's macroeconomic updates, investors in NextEra Energy Partners may have to temper their expectations for now.
Why interest rates are so important for NextEra Energy Partners
NextEra Energy Partners stock lost nearly 57% value in 2023, and the company slashed its dividend growth target through 2026 by nearly half to a range of 5% to 8% per year, with an annualized target of 6%. Management blamed a tighter monetary policy and higher interest rates.
NextEra Energy Partners typically relies on low-cost funding options like convertible equity portfolio financing (CEPF) to fund its growth and dividends. But with interest rates rising last year and its stock price falling simultaneously, it became costlier for the company to buy out CEPFs, making its prior dividend growth target range of 12% to 15% unsustainable.
NYSE: NEP
Key Data Points
It's easy to understand why interest rates are so important for NextEra Energy Partners. Although it is already working on its transition plan for growth, particularly the repowering of nearly 1.3 gigawatts of wind assets through 2026, it still will need interest rates to fall for it to be able to fund new growth and support dividends comfortably. With the Federal Reserve hinting in December that it would cut the federal funds rate multiple times in 2024, investors in NextEra Energy Partners turned hopeful.
However, a rate cut in March is looking unlikely now, or at least that's what Federal Reserve Chair Jerome Powell said during an interview on CBS's 60 Minutes that aired on Sunday. Not surprisingly, shares of companies with businesses that are highly sensitive to interest rates are falling Monday.
Could NextEra Energy Partners stock head lower?
While it's true that NextEra Energy Partners could thrive in a low-interest-rate environment, the company's transition plan to support annual dividend growth of 5% to 8% is on track. Last month, management confirmed that dividend objective and said the company should be able to grow its dividend by 6% in 2024 without an acquisition.
With NextEra Energy Partners projecting cash available for distribution in the range of $730 million to $820 million for 2024, compared to $689 million in 2023, the company should be able to navigate the year and grow its dividend even if interest rates don't fall as swiftly as expected. That also means value investors could find the 11.4%-yielding stock appealing if its price drops further.
