Is This Energy Dividend Stock Investing Profits… to Buy a Smart Home Company? | Jobs Reply

Energy companies are reporting record profits in 2022, helped by post-pandemic inflation and years of underinvestment in infrastructure. Many of these companies are reinvesting their fortunes in new energy generation projects, renewable energy, and returning money to shareholders through dividends and share buybacks.

NRG Energy (NRG -1.91%) doing the same. The utility company increased its dividend this year and announced a $1 billion share buyback plan last December. But he announced a new use for cash that investors weren’t too happy about: acquisitions Vivint Smart Home (VVNT -0.08%). What gives?

Another wild year for this energy stock

NRG is an integrated utility that supplies electricity and natural gas to customers primarily in Texas, California, and a handful of other states. Most of the company’s power plants are in Texas. Remember the winter storm Uri? NRG came under fire from many customers for failing utility services during that ugly winter of 2021.

Despite that major outage on the electric grid, NRG had an otherwise solid 2021 for financial results, which carried over into early 2022. But the company was hit again when one of its coal plants closed in Texas due to fire. That facility is expected to close until the second quarter of 2023. NRG’s net income has been down since then.

Net Income Chart (Quarterly) NRG.

Data at YCharts.

Deepen connections with the customer

All of this is against the backdrop of the announced Vivint acquisition. Amid a rapidly changing economy and consumer trends, NRG laid out a new strategy at its 2021 investor day. With the proliferation of mobile devices and the coming wave of electric vehicle adoption, NRG sees growth opportunities for a consumer-focused utility as himself. Specifically, it said it wanted to deepen connections with families by offering not only energy services but also enhanced smart home services that help consumers manage their daily lives.

So, it might not come as a complete surprise that NRG announced the acquisition of Vivint Smart Home. Vivint serves nearly two million households with products and services that include smart locks and security surveillance systems, garage door controls, smart lighting and thermostats, and the like. It also offers solar panels through Vivint Energy, although it sold its solar business to it Run of the sun (Sun 0.07%) back in 2020.

Why the market was not happy

NRG shares have fallen about 20% since the company announced its intention to buy Vivint. The all-cash price tag of $2.8 billion is only part of the reason. NRG had just $333 million in cash and short-term equivalents at the end of September 2022, so it will have to raise new debt (total debt was just shy of $8 billion as of last report) to take over Vivint. In addition, Vivint itself was $2.4 billion in debt, which will now become NRG’s liability.

NRG said it expects the addition of Vivint to the mix will increase annual adjusted earnings before interest, tax, depreciation and amortization (EBITDA) by $835 million. However, on an unadjusted basis, Vivint still reports a net loss ($41 million in net losses in the third quarter of 2022, to be exact). Free cash flow was $12.9 million last quarter on sales of $439 million. All of this comes at a time when NRG’s own profits are under pressure due to the shutdown of that coal plant.

After this unlikely merger between a utility company and a smart home company, I’d be hesitant to buy NRG stock — and especially with the current dividend yield of 4.3%. Don’t get me wrong, computer technology and electric vehicles are changing the way energy is used, and new energy generation technology will certainly play a role in meeting demand. The purchase of NRG may be a highly speculative move in hindsight. But the market is calling this a high-risk move for a reason and is punishing NRG stock in response. I believe there are better utility, renewable energy, and smart home stocks out there right now.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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