Why This Activist Investor Has Zeroed In On NRG

Stocks in the utilities sector are known for their stability and reliability. Utilities stocks are often viewed as a defensive allocation which investors can rely upon during times of crisis. With economic uncertainty on the horizon, many investors are considering investing in these companies, which generally pay out sizable dividends.

Recently, one company has attracted the attention of activist investors. NRG Energy (NRG) is an integrated power company that generates and sells electricity to households and businesses. Founded in 1989, NRG now operates across the energy space and boasts a market cap of nearly $8B.

NRG currently offers an annual dividend yield of around 4%.

Who Is Elliott Management?

Elliott is the world’s most prominent activist hedge fund. The firm’s strategy involves acquiring a sizable stake in a target company (often 5-15% of their outstanding shares), and then pushing for changes that will create value. Often, activists shake up a company’s board of directors or management so they can improve business strategy, finance, or operations.

In recent months, Elliott has become increasingly vocal regarding NRG. The investment firm released a lengthy presentation back in May, detailing their plan for revamping the company.

Why Is Elliott Focused on NRG?

NRG’s performance has stagnated recently. Over the past 5 years, their share price (not adjusted for dividends) has only increased by a cumulative total of ~12%. Their Q1 2023 earnings also came in below estimates a couple months ago.

Elliott had previously invested in NRG back in 2017, but the firm is now looking to get involved once again.

In terms of operations, NRG has faced a series of challenges which have hurt performance. Their generation plants were disrupted on several occasions due to weather-related incidents (and perhaps a lack of preparedness). Elliott would like to improve the company’s reliability to reduce the frequency and impact of any such outages going forward.

Strategically, NRG is set on becoming a vertically-integrated power company, which led to their acquisition of Vivint Smart Home in December 2022. They acquired the company for a total consideration of around $5.2 billion. Management’s idea was that since NRG and Vivint operate in adjacent industries, the combination could unlock synergies from integrating the companies’ products and sales operations. Elliott took a different view, and has argued that Vivint’s customers don’t actually align with NRG’s current market (both in terms of customer profile and geography). They also point to the fact that NRG (along with a number of other power, telecom, and cable companies) has previously tried to expand into home services and failed.

Takeaways

Elliott’s campaign is still ongoing. Last week the WSJ reported that Elliott is seeking to replace NRG’s CEO, aside from its goals to refresh the company’s board of directors. In response to these developments, NRG announced that it will boost its share-buyback program from $1 billion to $2.7 billion.

The utilities company already held their annual meeting on April 27, 2023. Management’s recommendations were largely followed, and only a handful of directors faced a mild degree of opposition. Until the next opportunity arises to nominate a dissident slate of director candidates, the activist fund may seek to drum up support from other shareholders.

Elliott has set an estimated price target of $55 if their plan is executed. NRG’s shares closed Monday at $35.91.