NextEra Energy Partners (NEP -1.73%) stock ended 2023 with a steep loss of 56.6%, but it could have lost investors a lot more money had it not rebounded in the last month of 2023. The renewable energy stock surged 29.2% in December, according to data provided by S&P Global Market Intelligence.
A massive macroeconomic development lifted hopes for investors in NextEra Energy Partners, and if things play out as expected, 2024 could be a solid recovery year for the stock.
NextEra Energy Partners’ woes, and plans
NextEra Energy Partners stock cratered when in late September, management slashed its annual dividend growth targets through 2026 by half to only 5% to 8% with an annual target of 6%. Until then, the company appeared to be going strong, acquiring renewable assets from its parent company, NextEra Energy, and third parties and generating steady, contracted cash flows from them to grow dividends.
Issues started to crop up as interest rates rose. The thing is, NextEra Energy Partners relies on low-cost funding for growth, particularly convertible equity portfolio financing (CEPF), which is converted into equity over time. But with interest rates rising and NextEra Energy Partners’ stock price falling at the same time in recent months, the company’s cost to issue new shares to buy out those financings creeped higher, making its dividend growth goal of 12% to 15% unsustainable. Income investors dumped the stock as its appeal as a dividend growth stock waned, and several analysts slashed their price targets. The stock’s yield shot up to double digits, and currently sits at 11%.
NextEra Energy Partners, however, already unveiled a transition plan. In December, it sold a portion of its natural gas assets as planned, raising net proceeds of $1.4 billion from energy infrastructure giant Kinder Morgan. With NextEra Energy Partners aiming to use part of the proceeds to buy out CEPFs through 2024 and 2025, investors were convinced the company was already working on a turnaround. As part of its turnaround plan, NextEra Energy Partners also identified wind assets to repower through 2026 and expects the move to generate attractive cash flows that should help fund its dividends.
Why NextEra Energy Partners stock could rally in 2024
The biggest catalyst for NextEra Energy Partners stock in December, though, was the Federal Reserve meeting, which set expectations of interest rate cuts in 2024 and 2025 rolling. Higher interest rates forced NextEra Energy Partners to cut its dividend targets, so any cut in rates should work in the company’s favor. Lower interest rates can help NextEra Energy Partners raise funds to convert CEFPs, refinance debt at better rates, repower its wind facilities, acquire new assets, and meet its new dividend growth goal.
In short, investors who bought NextEra Energy Partners stock toward the end of 2023 are essentially betting on a fall in interest rates in 2024. If interest rates do fall while the company works on turning things around, NextEra Energy Partners stock has a solid chance to recover in 2024.
Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan and NextEra Energy. The Motley Fool has a disclosure policy.
