Why NextEra Energy Partners Plunged Today

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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 target. Why? A potential cut to the company's 13.8% dividend could be in 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 target 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 8% target, and that the company may have trouble keeping the dividend this high while also paying off billions of looming convertible equity portfolio financing (CEPF) maturities. These types of project financings enabled NextEra to fund projects in a relatively low-cost and flexible manner, but NEP's CEPF notes were sold when interest rates were much lower. After 2026, there are $3.7 billion of looming maturities that will need to be paid off. While NextEra has time and options to pay off these liabilities, the increased cost of capital since the CEPFs were sold means that it will be expensive for NextEra to refinance. Thus, while management had contemplated private financings, Tucker thinks the lingering higher interest rate environment will necessitate a cut to the company's distribution. Tucker suspects a 50% cut could be in the cards, and may even be prudent. That would take care of the CEPF financing while leaving the company free from having to take on expensive debt or issue equity. Issuing equity would be painful, with the stock down 68% from its all-time highs. Be wary of MLPs that pay out high dividends Investors may have been tempted to buy NextEra in the past due to its ample and growing dividend. But the problem with these MLP models is that when interest rate or economic worries pop up and the stock goes down, the company can no longer issue stock to grow. Thus, the model becomes "stuck" and can result in painful dilution or cuts to what once looked like a mouth-watering dividend yield. It looks like that is what's happening with NEP today. Should you invest $1,000 in NextEra Energy Partners right now? Before you buy stock in NextEra Energy Partners, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and NextEra Energy Partners wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Story continues Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $757,001!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. See the 10 stocks » *Stock Advisor returns as of June 24, 2024 Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy. Why NextEra Energy Partners Plunged Today was originally published by The Motley Fool