Monday, BMO Capital Markets downgraded NextEra Energy Partners stock (NYSE:NEP) from Outperform to Market Perform and reduced its price target to $18 from $26. BMO cited concerns over persistently higher rates and their impact on yield-oriented and renewable energy stocks, which could hinder NextEra Energy Partners' cost of capital recovery.
According to InvestingPro data, NEP's stock has declined over 31% in the past six months, with current trading levels suggesting the stock is undervalued based on Fair Value analysis.
In the wake of rising interest rates, BMO analysts predict a significant decrease in the company's distribution, forecasting a roughly 65% reduction. The revised distribution per unit (DPU) outlook for the years 2025 through 2028 is set at $1.28, $1.36, $1.44, and $1.53, respectively.
This adjustment reflects a more conservative view on the company's financial strategy amid challenging market conditions. Currently, NEP maintains a significant 20.3% dividend yield and has raised its dividend for 11 consecutive years, as highlighted in InvestingPro's analysis, which offers 12 additional key insights about the company's financial health.
NextEra Energy Partners plans to use its retained cash flow and additional leverage to manage the maturities of its Corporate Entity Purchase Facility (CEPF) post-2027. Despite the distribution cut, BMO still expects the company to maintain a distribution growth rate of approximately 6.0% per year.
The new price target of $18 implies a total return of around 7%, according to BMO's analysis. This adjustment in rating and price target reflects the firm's recalibrated expectations for NextEra Energy Partners in a market environment where higher interest rates are likely to persist, affecting the broader renewable energy sector.
In other recent news, Constellation Energy (NASDAQ:CEG) saw a surge in shares following the Biden administration's decision to ease tax-credit rules for hydrogen production. This development is expected to benefit nuclear power plants at risk of retirement, positioning the United States as a global leader in green hydrogen. Analysts from Evercore ISI predict this will facilitate investment in clean hydrogen, benefiting Constellation, Public Service Enterprise Group (NYSE:PEG), and Vistra in the long term.
NextEra Energy Partners experienced a challenging third quarter, leading to a downgrade from Guggenheim and a shift in dividend policy. The company's management suggested a lack of private market support and public equity valuation, which could limit opportunities for growth financing or refinancing. Analysts note a potential shift in dividend policy, which could lead to further investor rotation away from NextEra Energy Partners.
JPMorgan also upgraded NextEra Energy Partners from Underweight to Neutral, following the company's third-quarter results. The company announced its plan to provide an update concerning the strategic review of its long-term obligations and cost of capital. The CEO hinted at a potential one-time cut to the Distribution Per Unit to alleviate overhang, suggesting a shift towards a GrowthCo model.
Finally, NextEra Energy Inc (NYSE:NEE). and NextEra Energy Partners LP reported a robust third quarter, with a 10% year-over-year increase in adjusted earnings per share. The company signed agreements with two Fortune 50 companies and Entergy (NYSE:ETR) for potential projects totaling up to 15 gigawatts by 2030. Despite decreased gas prices negatively affecting customer supply results, the company's renewable portfolio has grown significantly, with over 33 gigawatts originated since 2021.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.