NextEra Energy Partners (NEP 1.26%) pays a monster dividend. It currently yields nearly 14%, which is more than 10 times higher than the S&P 500's 1.3% dividend yield.
The renewable energy producer plans to continue increasing its prodigious payout at around a 6% annual rate in the near term. However, it's also evaluating alternatives to lower its cost of capital, which is a big reason its yield is so high. Opting for a different pathway could also lead the company to cut its payout.
NYSE: NEP
Key Data Points
Making progress
NextEra Energy Partners' CEO, John Ketchum, discussed the company's plans on the second-quarter conference call. He noted that the company had made progress on its current strategy of organically growing its earnings while simultaneously taking steps to shore up its financial foundation. Ketchum stated: "Since our last earnings call, the partnership completed the next NEP Renewables II equity buyout of roughly $190 million in June 2024 and paid down our 2024 convertible maturity with cash on hand. After repayment of a $700 million holdco debt maturity earlier this month, the partnership now has approximately $2.7 billion of liquidity."
The company's current focus has been on navigating the maturity schedule of various forms of financing it used to fund acquisitions. Among the most pressing needs has been buying out convertible equity portfolio financing (CEPF) from large institutional investors like private equity funds. It had planned to sell stock to fund these future buyouts. However, the roughly two-thirds decline in its share price over the past three years has taken that option off the table.
Instead, it has decided to sell off its natural gas pipeline assets to fund these buyouts. It sold its STX Midstream business for $1.8 billion at the end of last year and plans to sell Meade Pipeline in 2025. These sales should help address its buyouts over the next few years.
Staying on a growth path for now
Given its progress in shoring up its liquidity, "the partnership's 6% distribution growth target remains for now," stated Ketchum on the call. He noted that the company doesn't need to make an acquisition this year to reach that goal. Furthermore, it doesn't need to issue equity to fund growth until 2027.
A big driver of its near-term growth strategy will be organic expansion. The CEO noted that "the partnership has attractive organic growth from the repowering of its existing portfolio." It has already secured over 1.1 gigawatts (GW) of projects to repower existing wind energy assets with larger turbines that produce more electricity and cash flow. That has it well on its way to achieving its target of completing 1.3 GW of repowering projects by 2026 to help achieve its dividend growth outlook of 5% to 8% annually with a target of 6%.
Evaluating its next steps
NextEra Energy Partners' current plan would see it continue growing its payout through 2026 even as it addresses the upcoming maturity of additional funding. However, growth beyond that year remains uncertain, given its current high cost of capital. It simply can't issue stock at the current level to fund new acquisitions. Meanwhile, higher interest rates, and its elevated leverage ratio, make borrowing money prohibitive. If rates don't fall and its stock price doesn't improve, the company won't be able to grow while addressing future funding maturities.
That's leading the renewable energy company to "look at all options to secure a competitive cost of capital and to address the remaining convertible equity portfolio financing buyouts," stated Ketchum on the call. The CEO noted on the first-quarter call that "we have talked about private capital raise potentially being a solution to address back-end CEPFs for NEP." He reiterated this quarter that the company is continuing to explore that option, among others.
The company aims to put itself in a "better position for success going forward," stated the CEO on the call. The good news is, "We have time in 2024." It doesn't need to do anything since it doesn't plan to complete any new acquisitions this year and won't need new equity to fund its growth until 2027. However, it will eventually need to do something. That could include cutting its big-time payout, especially given its elevated dividend payout ratio, which the company expects will be in the mid-90% range through 2026. A reduction would allow it to retain more cash to repay maturing funding and finance new investments.
Safe for now
NextEra Energy Partners currently plans to increase its high-yielding payout by around 6% annually through 2026. However, it's evaluating all its alternatives so that it's in a better position to continue growing its operations in 2027 and beyond. Its options could include cutting its payout. So while it's safe for now, it might not be sustainable in the long term. That makes it a riskier option for income-focused investors.
