It’s been a flurry of earnings this week. On Wednesday (25 February) before the market open, energy giant NextEra Energy Inc (NYSE: NEE) reported its earnings.
However, for dividend investors, what was more of interest was how its subsidiary – NextEra Energy Partners LP (NYSE: NEP) – performed.
First off, investors need to understand the relationship between NextEra Energy and NextEra Energy Partners.
The former is the parent company and the third-largest energy company listed in the US. It’s focused on developing renewable energy projects but also owns and operates two large utilities in the state of Florida.
Meanwhile, NextEra Energy Partners is a separately-listed company that owns and operates clean energy assets, including wind, solar and battery storage, and natural gas pipelines.
NextEra Energy Partners grows by buying dropdown assets from its parent company and then distributes the reliable cash flows these assets generate to shareholders (with its parent being the biggest).
So, with NextEra Energy Partners stock yielding well over 4%, why did its share price drop by nearly 5% yesterday? Was this an overreaction by the market and is it a buying opportunity? Let’s find out.
Regulatory jitters at parent NextEra Energy
All the attention of the market focused on the fact that the Head of Florida Power & Light – NextEra Energy’s utility – was departing.
This came after an internal investigation by NextEra Energy, into potential violations of campaign financing laws in Florida, had concluded that there was no evidence of wrongdoing.
That saw NextEra Energy shares plummet by nearly 9%, its biggest single-day drop since 2020. For long-term investors, this isn’t an issue that should cause too much concern.
Dividend at NextEra Energy Partners keeps growing
Meanwhile, for NextEra Energy Partners, the association with its parent saw its share price get dragged down by 4.8%.
That came despite NextEra Energy Partners seeing adjusted EBIDTA growing at 20% year-on-year for full-year 2022, versus 2021.
In addition, NextEra Energy Partners also managed to announce a dividend that was 15% higher year-on-year versus the same period in 2021.
Since its IPO in 2014, NextEra Energy Partners has managed to grow its dividend by more than 330%.
What’s more, the company has grown its dividend every quarter since going public. In total, that dividend growth works out to a compounded growth rate of around 20%.
Going forward, management has also consistently guided for annualised dividend growth in the range of 12-15% through 2025.
On its earnings release on Wednesday, NextEra Energy Partners extended that guidance by a year – meaning investors can expect to see the annualised dividend per share (DPS) grow in the 12-15% range through 2026 (see below).
Source: NextEra Energy Partners Q4 2022 earnings presentation
This growth is very much in line with the projected growth of cash available for distribution (CAFD) driven by its clean energy portfolio, which is still seeing strong demand.
Financing channels still open
Given the size of its parent and the institutional demand for its cash-generating clean energy assets, NextEra Energy Partners has managed to access capital at a very attractive cost.
It still has US$2.5 billion of undrawn capacity on a corporate revolver while its interest rate risk is hedged with US$6 billion in forward-starting swaps.
Management is extremely experienced in managing fundraising risk and also foreseeing the best-in-class renewable energy opportunities, both of which comes from its parent extensive experience and portfolio.
Buying opportunity for dividend stock yielding over 4%
Overall, it was another solid quarter for NextEra Energy Partners and nothing has changed about its business.
There continues to be strong demand for its clean energy-generating assets and growth is on track, with management so confident in the outlook that they stretched out its 12-15% DPS growth projection by another year.
For a company that is growing its dividend at the top end of that range, and which yields well over 4% right now, it’s a compelling opportunity for dividend investors to pick up shares.
With exposure to the structural energy transition that will play out over the next few decades, being a subsidiary of the world’s largest renewable energy company will certainly help NextEra Energy partners shareholders benefit from consistently-growing dividend payouts.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of NextEra Energy and NextEra Energy Partners LP.
