Utilities Turn Away From Europe

European utilities are turning away from mainland Europe and investing primarily in emerging markets to spur growth

Travis Miller 6 February, 2013 | 12:53PM
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European utilities are slowly on the mend following the disastrous 2010-11 that led several to slash dividends and divest large portions of their businesses. Earnings rebounded in 2012, cash flow has improved and the dividends are well-covered albeit at a much lower level than their pre-crisis payouts. But with power and gas prices still stuck at cyclical lows and the sluggish economy still weighing on energy demand, we don't see much material earnings growth for utilities in continental Europe.

Utilities such as E.ON, RWE, EDF and GDF Suez offer compelling value opportunities

That said, many European utilities sported dividend yields above 6% as of early 2013 and long-term growth prospects outside of Europe appear robust enough that utilities such as E.ON (EOAN), RWE (RWE), EDF (EDF) and GDF Suez (GSZ) offer compelling value opportunities.

Still, European politicians and regulators continue to see utilities as an easy target, and we'll be watching tax and customer rate policies (notably in France and the UK) during 2013 that could have a material and lasting effect on earnings for several utilities, including EDF and National Grid (NG.).

To spur growth, many European utilities have turned away from mainland Europe, selling domestic assets and investing primarily in emerging markets. E.ON has targeted Russia, Brazil, and Turkey for growth investments in 2013-2014 while finishing its €15 billion divestment plan of operations primarily in developed markets. Similarly, E.ON's German peer RWE is shedding €7 billion of mostly Central European assets while investing in Eastern Europe. Enel (ENEL) is offsetting its woes in Spain and Italy with investments in its Latin American utilities and GDF Suez's 2012 acquisition of International Power gives it a foothold for investment in the Middle East and Asia.This year we'll begin to see if earnings and returns from those investments indicate management made smart strategic decisions.

This report was generated by Morningstar Equity Research Services.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
E.ON SE12.57 EUR0.48Rating
Electricite de France SA  
Enel SpA6.49 EUR1.39Rating
Engie SA13.53 EUR2.42Rating
National Grid PLC905.00 GBX0.44Rating
RWE AG Class A33.52 EUR1.27Rating

About Author

Travis Miller  is the director of utilities sector securities research at Morningstar.

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