/Solar%20panels%20in%20nature%20sunny%20by%20Mrganso%20via%20Pixabay.jpg)
President-elect Donald Trump's rhetoric notwithstanding, increased adoption of renewable energy sources is expected to continue. Amid climate change and the rising frequency of extreme weather events, the clean energy market is projected to surpass $2 trillion in size by 2032.
However, finding investment-worthy ideas in this space can be a difficult task, as the capital-intensive industry has struggled to gain traction during the Fed's high interest-rate regime. So, when brokerage firm Morgan Stanley double-upgraded this clean energy stock, it certainly grabbed attention.
Here's a closer look at this dividend stock, and the upcoming catalyst that caught Morgan Stanley's eye.
About Nextera Energy Partners
Founded in 2014 as a subsidiary of NextEra Energy, one of the largest utilities in the U.S., Nextera Energy Partners (NEP) was designed to own, operate, and acquire clean energy projects to provide predictable long-term cash flows, primarily from contracted assets. The company primarily focuses on wind and solar energy projects in North America, alongside natural gas pipeline infrastructure in Texas. Its market cap currently stands at $1.75 billion.
NEP stock has been under pressure this year, correcting a sizeable 40.8% so far. The stock has become a favorite of dividend investors for its fat yield, which is currently just shy of 20% - and in fact, quite a bit of NEP's recent decline seems to be tied to concerns that a dividend cut is coming soon.
However, more than one analyst thinks the heavy selling in this dividend stock is an overreaction.
Strategic Drivers for NEP Stock
NextEra Energy Partners is a limited partnership formed by NextEra Energy (NEE) for the purpose of acquiring, owning, and managing clean energy assets with stable long-term cash flows, ranging from wind and solar to battery storage and natural gas pipelines.
The company has experienced rapid growth in recent years, fueled by an aggressive acquisition strategy funded by debt. However, this approach has led to increased financial strain, with rising debt levels and higher interest expenses impacting its Q3 performance. In response, NextEra Energy Partners has taken steps to strengthen its financial stability, such as selling its Texas natural gas pipeline portfolio to Kinder Morgan (KMI) for $1.82 billion.
Future growth for NextEra Energy Partners is poised to benefit from expanding energy demand across the U.S., particularly from energy-intensive industries like data centers, which are increasingly reliant on AI-driven workloads. According to the U.S. Energy Information Administration's (EIA) latest report, renewable energy sources are set for substantial growth over the coming decades. Solar energy production is projected to quadruple, while wind energy generation is expected to more than double from 2022 levels, aligning with NextEra Energy Partners' focus on these renewable sectors.
NEP Stock Slides After Earnings
Let's get this out of the way; Nextera Energy Partners' results for the latest quarter were not good, with both revenue and earnings falling short of the Street's estimates. Operating revenues increased to $319 million from $308 million in the year-ago period, while the company reported a surprise loss of $0.43 per share.
For the first nine months of 2024, the company reported net cash from operating activities of $517 million. NEP exited the quarter with a cash balance of $290 million, but cash available for distribution (CAFD) declined 37% year over year to $155 million.
While management seems to be telegraphing an upcoming dividend cut, Nextera Energy Partners is well-positioned to benefit from the long-term secular tailwinds in the renewable energy sector. The partnership raised its wind repowering target to roughly 1.9 GW through 2026, up from 1.3 GW previously.
NEP fell more than 16% in a single session on Oct. 23 as investors responded to the earnings miss. The stock is now valued at just 8.47x EV/EBITDA, suggesting it's undervalued - and a potential bargain for investors, now that an expected dividend cut is likely priced in.
Analyst Opinion
Morgan Stanley thinks investors should consider buying the dip in NEP, with analyst Robert Kad writing, “We see an attractive entry point for this company in the recent selloff to position ahead of a potential near-term catalyst: the resolution of its strategic review, perhaps as soon as December or January.”
The note accompanied an upgrade to “Overweight” from “Underweight” and a price-target increase to $22, with Kad noting that “demand for renewables over the long-term is more durable than is currently appreciated by the market.” Income investors should note that the analyst is modeling a 50% distribution cut, which he believes is sufficiently priced in at these levels.
JPMorgan also upgraded the stock to “Neutral” after earnings, predicting a “likely one-time reset to CAFD and DPU” that it expects to help provide greater visibility into 2026.
Overall, analysts have deemed the dividend stock a “Hold,” with a mean target price of $25.53. This denotes an expected upside potential of about 41.8% from current levels. Out of 20 analysts covering the stock, 4 have a “Strong Buy” rating, 13 have a “Hold” rating and 3 have a “Strong Sell” rating.
