More than 12 million Floridians lost power during Hurricane Irma. Many of us were left in the dark for days.
Our heroes were the men and women of Florida Power & Light (FPL), a subsidiary of NextEra Energy (NYSE: NEE).
We cheered when we finally saw FPL’s trucks roll into our neighborhood and restore power.
And investors cheered when NextEra recently increased its dividend 13%.
But can NextEra afford to pay it?
Let’s take a look.
The Power of Free Cash Flow
NextEra is one of the largest utilities in the country. FPL is its largest unit.
Utilities have high fixed costs. So they’re usually cash poor.
That means NextEra generated negative $4.4 billion of free cash flow. It paid $1.8 billion in dividends.
Today, its cash stash has fallen to $550 million. That means NextEra is borrowing money to pay its dividend.
That’s not good.
This year, Bloomberg estimates NextEra won’t be able to fund its dividend from free cash flow either. Free cash flow is predicted to reach negative $2.6 billion in 2018. NextEra is expected to pay out $2.1 billion in dividends.
It looks like NextEra will have to borrow more money to fund its dividend.
An Impressive Track Record Isn’t Enough
Negative free cash flow is a big red flag. NextEra isn’t generating enough cash to pay its dividend, and it’s not expected to have positive free cash flow in the near future either.
Many things can go wrong for NextEra’s business. Nuclear or natural disasters, problems with regulators, or failure to pass on cost hikes to consumers could all lead to a dividend cut.
And although NextEra has raised its dividend every year for the last 23 years, its record isn’t perfect. It cut its dividend in 1994 by 32%.
NextEra has cut its dividend before, and if it has to, it will do it again.
Dividend Safety Rating: D
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