NextEra Energy Partners (NEP) stock price has continued to underperform the market this year as concerns about its revised growth and upcoming maturities. It has crashed by over 66% from its highest point in 2022 even as American equities have surged to a record high. This retreat has brought its valuation to over $2.2 billion.
Chasing income goes wrong
There are a few types of investors in the financial market. Some are often chasing growth and capital appreciation and others are constantly looking for regular income.
Growth-oriented investors often allocate capital to companies like Nvidia, Microsoft, and Apple while income investors are focused on companies that have a record of growing dividends.
Income-focused investors have several options. They can invest in Treasuries, which are now yielding over 4%, boomer candy ETFs like JEPI and QYLD, and junk companies like NextEra Energy Partners and Realty Income.
NextEra Energy Partners has become a favorite company for dividend-focused investors because of its substantial yield. Data shows that the forward dividend yield stands at 14.60%, making it one of the top-yielding companies in Wall Street.
A 14.60% yield means that a $10,000 investment may make $1,460 in income each year, a very good return.
However, when a deal is too good, it is always important to think twice. In finance, an asset generates a high yield when there are risks underneath. This is notable since a dividend yield is calculated by dividing annual dividends per share and the stock price and multiplying it with 100%.
In NEP’s case, the yield has surged because of its stock’s performance as it has dropped by 30% from its highest level this year and by over 66% from its record high.
Historically, investors chasing high yields have suffered as the companies have slashed their payouts. A good example of this is Medical Properties Trust (MPW), which cut its payouts because of its challenges with Steward Health and AT&T, which cut in 2022.
Therefore, it is always good to look at a company well before investing in it. While NextEra Energy Partners yields 15%, its total return in the last 12 months has been 42% while the S&P 500 index has risen by 22.9%. This is notable since the S&P 500 has a yield of less than 2%.
NextEra Energy Partners’ challenges
For starters, NextEra Energy Partners is an income-focused company that was started by NextEra Energy, the biggest energy utility company in the world.
It is a partnership that acquires and owns renewable energy projects in the US and then uses its revenues to pay its investors. It uses substantial debt to buy these assets, meaning that it is highly affected by changes in the Federal Reserve’s interest rates.
NEP’s stock has been in a strong downtrend for three main reasons. The first major reason is that interest rates have remained at an elevated level for a long time, making its cost of capital substantially high in the past few years.
On the positive sign, there are hopes that the Federal Reserve will start cutting rates later this month now that the economy is deteriorating.
Second, the company has narrowed its growth trajectory. In 2023, it lowered its guidance from between 12% and 15% to about 6%. Investors don’t love it when companies lower their forward guidance. In NextEra’s case, investors believe that the firm will not achieve these goals.
Third, NEP faces substantial maturities in the next few years. $1.6 billion are set to mature this year and is selling off some assets to finance them. It sold its South Texas Midstream pipeline for $317 million and used the funds to pay some of the debt.
At the same time, it has refinanced some of the funds after raising $750 million. It also has over $600 million in maturities coming up in 2025 and $550 million in 2027. This means that it will use the funds it raises from its Meade pipeline sale to fund these payments instead of paying investors.
Therefore, the risk for investors is that it will need to raise additional capital to pay these maturities. Some of these fundraisings will be through asset sales, debt refinancing, and equity.
Is NextEra Energy Partners stock a buy?
Technically, we see that the NEP stock price peaked at $72.08 in September 2022 and then crashed to a low of $17.75 in September last year. It then bounced back and moved to a high of $33.80 in June and has now been falling.
NextEra Energy Partners remains below the 50-day and 200-day moving averages and the key resistance point at $50.75, its lowest point in May 2021 and 2022. It has also formed a small head and shoulders pattern.
Therefore, the outlook for the stock is extremely bearish, with the next point to watch being at $17.74, its lowest point in 2023.
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