NextEra’s NEE stock yields 2.8%, NEP yields 14%: better buy?

NextEra Energy (NYSE: NEE) and NextEra Energy Partners (NYSE: NEP) stock prices have diverged this year. NEP shares have dropped by over 12% this year while NEE has risen by over 18%, outperforming the S&P 500 and Nasdaq 100 indices. So, which is a better buy between the two?

What are NextEra Energy and NextEra Energy Partners?

NextEra Energy is the biggest energy utility company in the US with over $147 billion in market valuation. It is followed by companies like Southern Company, Duke Energy, Sempra, and American Electric. 

NextEra Energy serves over 5.9 million customer accounts and over 12 million people mostly in Florida. It also owns NextEra Energy Resources, the biggest renewable energy generator in the US. 

NEE’S business has been growing rapidly in the past few years. Its annual revenue has jumped from over $19.2 billion in 2019 to over $28 billion as demand for energy has risen. Its net income has soared from over $3.7 billion in 2019 to over $7.4 billion.

NextEra Energy Partners, on the other hand, is described as a yieldco that invests in green energy assets. It owns assets from NextEra Energy and helps it to free its balance sheet. 

This business model benefits the two players. In this case, investors interested in generating income invest in NEP, which lets it raise cash to buy more assets, NEE then builds more assets and sells them to NEP.

This explains why NEE has a lower dividend yield than NEP. NEE yields just 2.8% and is seen as a good value investment while NEP yields 14%, making it a great investment for dividend-focused investors.

Which is a better buy?

Therefore, the question among investors is on which is a better company to invest in between NEE and NEP. The simplest approach in this case would be to invest in NextEra Energy Partners because of its partnership business model and its high dividend yield.

However, looking at the dividend yield only is a risky since investors should always look at the total return. Total return is calculated using the stock price return and dividends. 

A look at the two companies shows that NextEra Energy has been a better performer. In the past five years, NEE has risen by more than 54% in the past five years while NEP has dropped by over 30%. 

The same has happened in the past 12 months when the stock has crashed by over 48% while NEE has dropped by just 0.4%. As shown below, the total return of NEE has been better than NEP this year.

NEP dividend cut risks

NextEra Energy Partners stock price has underperformed NEE because of the rising fear that it will be forced to cut its dividend. This fear has risen because of higher interest rates, which have made many acquisitions less profitable.

As a result, the company slashed its growth guidance from 12-15% to 5.8%. There are also concerns that the company will need to raise more cash or slash its dividend. In a recent announcement, the company said that its balance sheet has room to support it until 2027. 

Just this week, analysts at RBC slashed their outlook for the NextEra Energy Partners to sector perform from outperform. It then slashed its target from $38 to $30. This explains why the stock has a short interest of 5.7%.

Therefore, in this case, while NEP has become quite undervalued, I suspect that it is a value trap for now. As such, I believe that NEE is a better investment because it faces no dividend risks. 

The next key catalyst to watch will be the company’s earnings scheduled for July 22nd. These will be important results as they will shed light on its business and finances.