What Is NextEra's Risk Profile?

In an earlier thread, Jim mentioned buying NextEra’s junior subordinated debenture, NEE-N (alternatively, NEE-PN, NEE/PRN, or NEE.PR.N, depending on the broker or website where it is quoted). Whatever its symbol, it wasn’t an issue I owned. So I was intrigued. “Why had I ignored it?”

A bit of digging discovered that that NEE also had something it called “equity units”, NEE-P, and an affiliate, NextEra Cap, had 14 bonds. So, which --if any-- might be attractive? The bonds are rated Baa1/BBB+. The jr deb and the equity unit, Baa2/BBB, and the Moody’s report on the bonds all but fell over itself singing NextEra’s praises. But the website I trust for fundamental analysis said the company sucked majorly, and it gave NextEra six red flags on the following points:

(1) NEE’s short term assets ($11.0B) do not cover its short term liabilities ($22.4B).
(2) NEE’s short term assets ($11.0B) do not cover its long term liabilities ($78.3B). (Nor would I expect that they should.)
(3) NEE’s net debt to equity ratio (131.6%) is considered high.
(4) NEE’s debt to equity ratio has increased from 129% to 134.9% over the past 5 years.
(5) NEE’s debt is not well covered by operating cash flow (13.8%).
(6) NEE’s interest payments on its debt are not well covered by EBIT (1.4x coverage).

As noted, I could care less about point #2. But #1, #4, and #6 say --to me-- that the company is having a hard time making money. Hence, it is very likely --at some point in the future-- to stop paying dividends, at least temporarily, until it can fix its cash flow problems. OK, that’s NEE’s ‘Health Profile’. What about its ‘Valuation’?

Again, my fundie website says the company sucks in terms of ‘value’.

(1) It is “over-valued” at its current price. (Hence, it can be assumed any derivatives of it are over-valued as well.)
(2) Its PE, PEG, and PB are each many times NextEra’s industry’s average.

A mid-tier, triple-BBB rating would normally suggest that the company’s stock and bonds are mid-tier in risk. But I’d rated the debenture as ‘spec-grade’, and I’d avoid it for not offering enough reward for its implied risks. This isn’t to say my judgment is correct. But if I second-guess the vetting procedures that generally keep me out of trouble, then I might as well just start throwing darts instead.



GM Arindam,

If you’ve never ridden a bicycle before, hopping on one can be risky. Also, no matter how experienced one is, cycling can’t said to be ‘risk-free’. But the risks can be anticipated and managed better by them who are experienced than by them who aren’t.

That hits home for me. After years of bike riding and thousands of miles, about a month ago I had my first wreck. Dove right over the handle bars and pile drove my head (helmet on) right into the pavement. A week later I was back on my bike, but I still haven’t fully recovered (my 64 year old body just doesn’t bounce back as quickly anymore).

As far as NEE-PN is concerned, I’m still comfortable with it. But then again, I was comfortable cruising down that hill a month ago just before my front brakes grabbed.:slight_smile:



As a fellow cyclist, I can “feel your pain”.

For me, it was coming down a gentile hill and making a turn at the bottom when the bike slide out under me as I hit a patch of loose, wet leaves. Ripped holes in my left pant leg and the skin underneath. Ouch! Another time, I was coming out of a parking lot and crossing the street when I jumped the chain and went down fast, my head was slamming the ground hard. Saw stars for moment, but suffered no injury. (Thank goodness for helmets.)

As for your buying NEE-PN and me not buying it --or any other issue-- that’s more than to be expected, because each of us worries about different things, because each of us comes to markets with different past experiences and different present expectations. An analogy would be fishing. There are dozens of ways to do it and what often matters isn’t bringing lots of fish to net, but just being on the water and enjoying the time away from a computer screen.

My suggestion, though, would be this. No matter how risky an opportunity seems to be --or how promising-- it’s proper position-sizing that’s going to mean long-term survival, not “diversification”, which is a crock, because when markets are under stress, correlations tend toward 1.0. Yeah, when a sketchy position works out, we all wish we had bought more. But when such positions fail, we’re glad we didn’t buy more than we did.

Linda Raschke --one of the world’s top traders whom most have never heard of-- addresses this problem by making all of her bets the same size. That a tactic I’ve borrowed for my own investing. If it’s a junk bond, I buy just two. I’ll go five for ‘enterprising’ and ten for ‘defensive’. I’m trying to do the same with my buying preferreds.