NextEra Energy Partners(NYSE: NEP) offers a monster dividend. The clean energy infrastructure operator's payout yields nearly 13%. That's about 10 times higher than the S&P 500.
Despite that elevated yield, the renewable energy company recently increased its payment again. While it expects the upward trend to continue, a potential future catalyst could disrupt those plans.
The growth continues
NextEra Energy Partners recently reported its second-quarter results and declared its latest distribution payment. The leading renewable energy dividend stock generated $560 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the period. That was up 15.2% from the prior-year period. Meanwhile, its cash available for distribution (CAFD) rose 10% to $220 million. Its growth was powered by new projects added to the portfolio and strong results from its existing assets. Those catalysts more than offset the lost income from selling STX Midstream late last year.
The company also declared its latest dividend payment. It set the quarterly distribution at $0.905 per unit ($3.62 annualized), a 1.4% increase from last quarter and 6% above the year-ago level. This raise aligns with the company's reset growth expectations of delivering 5% to 8% annual dividend growth, with a target of around 6%.
The renewable energy producer believes it has enough power to achieve that level of dividend growth this year without needing to make another acquisition. It anticipates ending this year with its adjusted EBITDA in the range of $1.9 billion to $2.1 billion, while CAFD will be between $730 million and $820 million. That drives its confidence that the payout will rise to a $3.73 per share annualized rate by year-end.
Planning for more growth
NextEra Energy Partners expects to deliver 5% to 8% annual dividend growth with a target of 6% per year through at least 2026. The main catalyst is its organic growth plan, driven primarily by repowering 1.3 gigawatts (GW) of wind energy projects through 2026. The company has already secured nearly 1.1 GW of projects, which increases its confidence in delivering on its goal.
Another factor driving its confidence is its plan to sell its remaining natural gas pipeline assets (Meade Pipeline) next year. That sale will give it the proceeds to buy out more of the convertible equity portfolio financing (CEPF) it used to fund previous acquisitions. The company completed the buyout of $190 million of this funding in the second quarter (funded from the STX Midstream sale). It has another buyout due next June (which it also expects to fund with the STX Midstream proceeds), while next year's Meade Pipeline sale should help cover future buyouts.
Buying out this financing should help take some of the pressure off its balance sheet and stock price (shares are down nearly 70% from their high three years ago). That should help improve its cost of capital, enhancing its ability to externally finance growth by issuing lower-cost debt and equity funding. The company could also get a cost of capital boost from falling interest rates if the Federal Reserve starts cutting them later this year, as many anticipate.
However, the company also continues to evaluate alternatives to improve its cost of capital and address its remaining CEPF obligations. One potential alternative would be to reduce or suspend its dividend. Such a move would enable it to retain additional cash that it could use to fund future CEPF buyouts and renewable energy acquisitions. The risk of a reduction is one of the primary reasons why its dividend yield is in the double digits.
The payout's future remains murky
NextEra Energy Partners currently plans to continue growing its distribution, targeting 6% annual increases through at least 2026. However, it's also evaluating alternatives to bring down its cost of capital, which could include reducing or suspending its payout. Because of that, it remains too risky for income-seeking investors right now.
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Matt DiLallo has positions in NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
