NextEra Energy Partners (NEP 0.55%) has fallen on hard times. Surging interest rates have delivered a double whammy. They've made borrowing money to refinance existing funding and finance new acquisitions a lot more expensive. They have also weighed on its stock price, which has lost two-thirds of its value from the peak. That has driven up its dividend yield to more than 10%.
However, that headwind should fade this year as the Federal Reserve cuts rates. In addition, the company is working hard to shore up its financial position so it can start growing again. If everything goes according to plan, these catalysts could give the renewable energy company the power to produce prodigious total returns.
A potentially monster income stream
NextEra Energy Partners pays one of the highest-yielding dividends around. At the current rate, a $1,000 investment could generate more than $100 of annual dividend income.
The big question is whether the company can maintain its monster yield. NextEra Energy Partners currently has no plan to cut its dividend. Instead, it intends to continue growing its payout through at least 2026. The company aims to increase it by 5% to 8% annually with a target of 6% growth. While that's slower than its initial forecast of 12%-15% annual dividend growth, it's a solid dividend growth rate, especially from such a high-yielding stock.
However, there is one huge caveat. NextEra Energy Partners expects its dividend payout ratio will be in the mid-90s through 2026. That's extremely high and leaves little margin for error. If everything doesn't go perfectly according to plan, the company might need to press pause on increasing the payout or even reduce its dividend to get more breathing room.
A plan to power growth
NextEra Energy Partners unveiled a two-part strategy last year to address its balance sheet issues while continuing to grow its dividend. The first part is to become a pure-play renewable energy producer by selling off its gas pipeline assets. It intends to use the cash from those sales to buy out its remaining convertible equity portfolio financings (CEPFs) as those acquisition funding vehicles mature over the next few years. It will use any remaining proceeds to make acquisitions.
The company sold its STX Midstream assets to Kinder Morgan for $1.8 billion last year. It used that cash to repay related debt and will use the remaining money to complete the buyouts of CEPFs that mature through June 2025. NextEra Energy Partners plans to sell its remaining gas pipeline assets, Meade Pipeline, next year. That sale should help fund additional CEPFs and provide it with all the equity funding it needs to make acquisitions until 2027.
The company has also shifted its near-term growth strategy from acquiring operating renewable energy assets from its parent, NextEra Energy, to organic growth. It has identified 1.3 gigawatts of existing wind energy assets it intends to repower through 2026. These high-return projects replace legacy wind turbines with larger, more powerful ones that produce more electricity and cash flow. NextEra Energy Partners believes that repowering projects alone can power its plan to increase its dividend by 6% this year. Meanwhile, it estimates it won't require additional equity capital to fund its growth until 2027.
High total return potential
NextEra Energy Partners has tremendous total return potential if it can execute its plan. It could pay a monster dividend that would continue to rise while enhancing its financial foundation. Redeeming its CEPFs would help lift some of the weight off its stock price. Add the potential uplift from falling rates, and the company's stock price could rebound sharply. That would enable it to use its equity to make acquisitions again, potentially accelerating growth. While there's a lot of risk that things won't go according to plan, which could cause it to cut its dividend, the upside potential is very compelling.
