NRG Fastest Mover in S&P As Activist Investor Pushes For Change

Key Points

• Houston-based utility NRG Energy surged 3.94% as the company addressed concerns of activist investor Elliott Management, which acquired a $1 billion stake in NRG in May.
• The company announced plans to return 80% of excess cash to shareholders and allocate 20% for growth, expecting $6.9 billion in capital returns through share repurchases and dividends.
• NRG increased its share repurchase authorization to $2.7 billion and projects annual dividend growth of 7% to 9%.
• The company aims to reduce debt by $2.55 billion.

Houston-based utility NRG Energy Inc. (NYSE: NRG) gapped up 3.94% on June 22, making the stock the fastest mover in the S&P 500 for the session.

The story behind the uptick is a lesson in behind-the-scenes shareholder activism with the potential to unlock value for owners. 

The move was spurred by a Wall Street Journal report that activist investor Elliott Management, which took a $1 billion stake in the utility in May, was pushing for reforms, including the ouster of CEO Mauricio Gutierrez. 

NRG posted the following returns over rolling time frames:

• 1 month: 1.16%
• 3 months: 3.22%
• Year-to-date: 8.85%

That’s better than the Utilities Select Sector SPDR Fund NYSEARCA: XLU, which is again lagging as growth stocks took the lead in 2023. In 2022, utilities, perhaps the ultimate defensive sector, eked out a return of 1.42%, joining energy as the year’s only sectors with positive returns. 

Track Record Of Increasing Dividends

MarketBeat’s NRG dividend data show a yield of 4.30% on an annual dividend of $1.51 per share. The company has boosted its shareholder payout in each of the past four years.

The stock’s upside action on June 22 was due to the company announcing several measures to improve its financial condition. Those include: 

• NRG anticipates a 15% to 20% annual increase in free cash flow before growth per share from 2023 to 2027, resulting in $8.3 billion of cumulative excess cash. That metric refers to the cash generated for distribution and reinvestment, excluding growth-related expenditures.
• It plans to return 80% of excess cash to shareholders while investing 20% in growth. It’s forecasting $6.9 billion in capital returns through share repurchases and dividends. The share repurchase authorization has been increased to $2.7 billion. NRG anticipates annual dividend growth in a range from 7% to 9%.
• The company aims to reduce debt by $2.55 billion, improving credit metrics. Bond rater Fitch now assigns a rating of BB+ to NRG’s debt, putting it in the “stable” category. Fitch considers a rating of BB to be “speculative,” meaning there’s some risk of default. However, the added characterization of the company’s debt as “stable” means that risk may currently be minimal.
• NRG plans a $150 million cost reduction initiative, along with $400 million in synergies from previous acquisitions, including a controversial acquisition of Vivint smart home systems, which closed in March.
• The company says the acquisition will enhance its capabilities to provide a greater number of services to households. Through a combination of cross-selling, bundling and organic growth, NRG expects to achieve $300 million of incremental free cash flow before growth by 2025.

It’s probably safe to say none of those initiatives would have been announced if Elliott hadn’t sent a letter to NRG in mid-May, using very direct language to make clear its position that NRG “has meaningfully underperformed due to a number of operational and strategic missteps.”

Activist Investor Not Mincing Words

Elliott didn’t mince words in calling the Vivint acquisition “the single worst deal in the power and utilities sector in the past decade.” Elliott said NRG could take steps including adding independent directors, achieving at least $500 million of recurring cost reductions, reviewing the strategic direction of its Vivint home services unit, and establishing a new capital allocation framework to return to shareholders at least 80% of free cash flow.

NRG is clearly addressing those concerns with the increased share buybacks and cost cuts. It also said it’s evaluating changes to its board. 

Is NRG A Watchlist Candidate Now? 

So does all this make NRG a good watchlist candidate at this point? 

It’s still early in the company’s process of making changes, and one day’s worth of price leadership isn’t necessarily a sign of more upside to follow, at least in the near term. NRG is actually the third-best price performer within the utilities sector year-to-date, behind Edison International NYSE: EIX and Pinnacle West Capital Corp. NYSE: PNW, which owns Arizona Public Service Company. 

Utilities essentially offer one major benefit, which was highlighted in Elliott’s letter to NRG: The ability to return capital to shareholders, which can provide ballast during a market downturn. That’s exactly what helped the sector eke out that small return in 2022 while other sectors stumbled. As such, it may be a category where investors are better off investing in the broad-sector ETF, rather than attempting to sort out the best shareholder return for individual stocks.