NextEra Energy Partners Could Be a Growth Machine
Every yieldco wants to have a low cost of capital it can use to fund projects that drive long-term dividend growth. And if the market has confidence in a yieldco, it can drive a low cost of capital that leads to a perpetual cycle of positive growth for that company.
But the opposite can also be true. If a yieldco's cost of capital rises, it can lead to a death spiral caused by rising interest payments, falling dividends, and eventually a restructuring. That's what happened to TerraForm Power (NASDAQ: TERP) and TerraForm Global (NASDAQ: GLBL) when SunEdison started to collapse.
One yieldco that has gained the market's confidence and should have a lot of growth ahead is NextEra Energy Partners (NYSE: NEP), which has both a low cost of debt and equity, the perfect combination for a yieldco.
The low cost of debt every yieldco envies
NextEra Energy Partners has a cost of debt that's lower than most yieldcos on the market today. It recently issued $550 million of senior unsecured notes due 2024 at an interest rate of 4.25% and $550 million due 2027 at a 4.50% interest rate.
Compare that to TerraForm Power, whose notes due 2023 and 2025 carry interest rates of 6.38% and 6.63%, respectively. NRG Yield's (NYSE: NYLD) notes due 2024 and 2026 have interest rates of 5.475% and 5.00% for those years. Only Brookfield Energy Partners (NYSE: BEP) has better interest rates of 3.75% and 4.63% for notes due 2025 and 2027, respectively.
Low-cost debt is only half the equation for yieldcos. Most also issue new equity to grow, and NextEra Energy Partners has a big advantage there as well.
The benefits of a low dividend
When a yieldco issues equity to buy projects, the intention is to issue equity that "costs" less than the return generated from the acquired projects. For example, if a company's dividend yield is 6% and it buys projects that have an 8% rate of return, those projects could be funded by selling new equity -- and it would actually help add cash flow for the dividend in the long term. You can see below that NextEra Energy Partners has one of the lowest dividends in the industry, meaning it will be able to use its stock to buy growth projects.
Combined with the low cost of debt, NextEra Energy Partners could easily issue debt and equity and buy projects that would guarantee dividend growth for many years. Buying projects now would also guarantee those cash flows. If a yieldco waits to buy projects, it risks losing the low cost of either debt or equity, which is actually what crushed TerraForm Power and ultimately SunEdison. The market's confidence is key -- and NextEra Energy Partners should pounce while it has the opportunity to be a growth stock in renewable energy.
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Travis Hoium owns shares of NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.