NextEra Energy Partners (NYSE: NEP) currently pays a monster dividend. The renewable energy producer has an eye-popping yield currently in the mid-teens. It has continued to grow its big-time payout, which has risen 6% over the past year.
However, a day of reckoning could be coming in January. Here's a look at what might happen to the payment starting next year.
NextEra Energy Partners had grown briskly for many years. Powering its growth has been a steady stream of acquisitions, which it funded primarily with convertible equity portfolio financing (CEPF) arrangements with large institutional investors. This funding has buyout requirements that the company expected to satisfy by issuing stock. Unfortunately, surging interest rates have weighed on the stock price, making it much too dilutive to sell shares to buy out CEPFs as they mature.
The company has taken a couple of notable steps to address the situation. It has significantly slowed its dividend growth rate from 12%-15% annually to 5%-8%, with a target of 6%. It's also selling off its natural gas pipeline assets in stages to help fund its CEPF buyouts and renewable energy asset acquisitions. The hope was that these moves would buy it time to figure out a more permanent solution to improve its cost of capital.
NextEra Energy Partners had planned to continue growing its dividend by around a 6% annual rate through at least 2026, powered primarily by repowering wind energy assets -- i.e., replacing older turbines with larger, more powerful ones. However, the company has removed that guidance from its most recent earnings report. It also plans to complete its CEPF and cost of capital review by January 2025. That seems to suggest investors can expect a big change next year.
NextEra Energy Partners had provided a similar outlook over the past several quarters. For example, in its second-quarter earnings report, it wrote: "NextEra Energy Partners continues to see 5% to 8% growth per year in limited partner distributions per unit, with a current target of 6% growth per year, as being a reasonable range of expectations through at least 2026. The partnership does not expect to need an acquisition in 2024 to achieve its 6% limited partner distribution growth target."
However, that language was absent from the company's recent third-quarter earnings report. Instead, NextEra Energy Partners commented on the continued evaluation of alternatives to address its future CEPF buyouts and cost of capital. The partnership wrote that it's evaluating alternatives that focus "on its capital structure and the potential for redeployment of more cash flow toward driving organic cash flow growth." In reading between the lines, the company seems to be leaning toward reducing its dividend so that it can retain more cash to reinvest in expansion projects.