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NRG Energy (NRG) to Gain From Acquisition Amid Supply Woes

NRG Energy, Inc. NRG continues to expand through organic and inorganic initiatives. The company’s services for a wide variety of customers and focus on emission cuts will boost its long-term growth. NRG’s dividend policy and repurchase of shares will further increase its shareholders’ value.

However, this Zacks Rank #3 (Hold) stock has to face certain headwinds, such as stiff competition in the wholesale power markets and risks related to disruptions in the fuel delivery system.

Tailwinds

Recently, NRG completed the acquisition of Vivint Smart Home, which will form a leading provider in the essential home solutions market and create a unique end-to-end ecosystem, driven by unparalleled data and insights. The deal will also improve and diversify NRG’s financial profile with more predictable earnings through Vivint’s subscription-based model and long-term customer agreements.

The company is focusing on clean generation to lower emissions. It targets to achieve a 50% emission cut by 2025 and net-zero emissions by 2050 from the 2014 baseline. NRG entered renewable power purchase agreements totaling 2.4 Gigawatts (GW) with third-party project developers and other counterparties. It continues to optimize its generation portfolio by retiring uneconomic fossil fuel plants, monetizing non-core assets and partnering for brownfield development.

NRG Energy continues to increase dividend and attract investors. In January 2023, the company declared that its board of directors approved a quarterly dividend of 37.75 cents per share, indicating an 8% increase from the previous year. This resulted in an annualized dividend of $1.51 per share. The hike is in sync with the company’s long-term annual dividend growth target rate of 7-9% per share. Capital allocation for 2023-2025 is $6.5-$7 billion, out of which 35-40% will be utilized for share repurchases, around 15% for payment of dividend, 10-15% for Vivint growth, 20-25% for debt reduction and 10% for the Vivint acquisition. The capital allocation plan will further strengthen the company’s balance sheet and increase shareholders’ value over the aforesaid period.

Headwinds

The financial performance of NRG's retail operations may suffer from volatile electricity, and gas supply costs and demand. The gas sold by the company in retail and wholesale markets is purchased from third parties. Foreign currency fluctuation and cyber-based security risk may also impede its growth.

NRG Energy’s costs, results of operations, financial condition and cash flows can be adversely impacted by the disruption in its fuel supplies. This is because the company relies on natural gas, coal and oil to fuel the majority of its power generation facilities. These facilities are subject to the risks of disruptions or curtailments in power production in case of counterparty failure or a disturbance in the fuel delivery system.

Stocks to Consider

Some better-ranked stocks from the same industry are MGE Energy, Inc. MGEE, NiSource Inc. NI and Unitil Corporation UTL, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for MGE Energy, NiSource and Unitil’s 2023 EPS indicates increases of 9.5%, 6.8% and 7.34%, respectively.

Long-term (three- to five-year) earnings growth of MGE Energy, NiSource and Unitil is pegged at 5.35%, 6.8% and 7.08%, respectively.

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