Why NextEra Energy Partners Plunged Today

Shares of NextEra Energy Partners (NYSE: NEP) fell on Monday, down 8.7% in today’s trading.

The master limited partnership (MLP) focused on buying and holding renewable energy projects from parent utility NextEra Energy (NYSE: NEE) was down after a Wall Street analyst downgraded the stock and lowered his price goal.

Why? A possible cut to the corporate’s 13.8% dividend might be within the cards.

RBC forecasts a dividend cut for NextEra

In his note today, RBC Capital analyst Shelby Tucker lowered his rating on NextEra Partners from outperform to market perform, cutting his price goal from $38 to $30.

Tucker now believes that there aren’t enough lower-cost wind repowering opportunities to grow NextEra’s earnings to its 5% to eight% goal, and that the corporate can have trouble keeping the dividend this high while also paying off billions of looming convertible equity portfolio financing (CEPF) maturities. A majority of these project financings enabled NextEra to fund projects in a comparatively low-cost and versatile manner, but NEP’s CEPF notes were sold when rates of interest were much lower. After 2026, there are $3.7 billion of looming maturities that can should be paid off.

While NextEra has time and options to repay these liabilities, the increased cost of capital for the reason that CEPFs were sold signifies that it would be expensive for NextEra to refinance. Thus, while management had contemplated private financings, Tucker thinks the lingering higher rate of interest environment will necessitate a cut to the corporate’s distribution. Tucker suspects a 50% cut might be within the cards, and will even be prudent. That might deal with the CEPF financing while leaving the corporate free from having to tackle expensive debt or issue equity. Issuing equity could be painful, with the stock down 68% from its all-time highs.

Be wary of MLPs that pay out high dividends

Investors can have been tempted to purchase NextEra prior to now as a consequence of its ample and growing dividend. But the issue with these MLP models is that when rate of interest or economic worries pop up and the stock goes down, the corporate can not issue stock to grow. Thus, the model becomes “stuck” and may end up in painful dilution or cuts to what once looked like a mouth-watering dividend yield. It looks like that’s what’s happening with NEP today.

Must you invest $1,000 in NextEra Energy Partners straight away?

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Billy Duberstein and/or his clients haven’t any position in any of the stocks mentioned. The Motley Idiot has positions in and recommends NextEra Energy. The Motley Idiot has a disclosure policy.

Why NextEra Energy Partners Plunged Today was originally published by The Motley Idiot

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