Guggenheim Securities LLC is raising its price target for NRG Energy Inc. to $51 from $38, following a "very productive" meeting with the company's top executives.
Shares of NRG closed at $37.52 on Oct. 17.
NRG has been added to Guggenheim's "Best Idea" list. Vistra Energy Corp., though it retains a "Buy" recommendation, is no longer on the Best Idea list.
The price target increase effectively translates to an 11% increase in free cash flow yield, based on NRG being in a prime position to deploy its dry powder due to a leaner structure, partly the result of asset sales.
Guggenheim estimates $2 billion in NRG buybacks of its stock in 2019 with a total of $3.5 billion to be repurchased through 2022. The independent power producer is targeting a ratio of 3x net-debt-to-EBITDA.
"NRG is reaching a key inflection point with asset sales and margin enhancements primed to generate significant cash flows through 2022," Guggenheim Analyst Shahriar Pourreza wrote in an Oct. 16 research report.
The report cited "tightness in [the Electric Reliability Council of Texas] and growth of NRG's retail business" as key factors enabling NRG to facilitate large-scale buybacks.
Overall, NRG's recent "margin enhancements," including asset sales, are expected to generate approximately $8 billion in excess cash flow through 2022, according to Guggenheim.
Guggenheim analysts said they favor buybacks over dividends over the following 18 months and do not consider a dividend payout likely until 2019 has passed, a longer stretch than past projections of six to 12 months.
"This is a slight shift from our previous thinking that it could be addressed this year but given where stock trades, makes sense to us to kick the token dividend decision down the road," Pourreza wrote, noting that Vistra has also faced a recurring decision between buybacks and dividends.
NRG commenced its buyback program after the sale of its yield company and renewable business to Global Infrastructure Partners wrapped in August.
The deal netted the Princeton, N.J.-based company approximately $1.3 billion in cash while allowing it to shed $6.7 billion in debt.