European Utilities for Dividends

VIDEO: Morningstar analyst Tancrede Fulop separates European utilities stocks into the Good, the Bad and the Ugly 

Holly Black 24 June, 2020 | 10:46AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Tancrede Fulop. He is a Morningstar analyst in Amsterdam. Hello.

Tancrede Fulop: Hello, Holly. Thanks for having me.

Black: So, Tancrede, you've been doing some investigation on the utilities sector in Europe. How have these stocks held up so far this year?

Fulop: Pretty well. The sector is flat year-to-date whereas the broad market is down by around 10%.

Black: And one reason a lot of people like these stocks is that they pay dividends but we've seen a lot of dividend cuts across the board amidst the coronavirus pandemic. So, what is the outlook for the payouts for these firms?

Fulop: Yes. As you mentioned, there was a wave of dividend cut back in March which caught investors off guard. Five companies cut or cancelled their dividends including the four French utilities. But besides them, going forward we see a limited risk of dividend cuts. We distinguish three groups of utilities dividend-wise. So, the ones who cut their dividend, those five, we call them the ugly group. Then there is a bad group of three companies which issued cautious comments on dividends without cutting them yet. And then, the group which is the biggest group that we call the good group, is made of nine companies which maintained and relatively achieved their dividend and dividend plans. So nine companies and for them - apart from one company - we think the dividend is mostly safe because it's covered by free cash flow and by earnings growth.

Black: Okay. So, we have the good, the bad and the ugly. Should we talk about a couple of the stocks that you particularly like in the good group?

Fulop: Yes, sure. So, I like Enel. It's in 3-Star territory now, so slightly overvalued but not significantly. You have a dividend yield of close to 5%. Importantly, there is dividend for up to 2022 which guarantees annual dividend growth of around 6% and going even beyond 2022, to 2024, I expect annual dividend growth 6% in line with the EPS growth because the company has good positioning in renewables and in regulated networks and all that with a yield of 4 to 5%.

Another one that I like is RWE. So, you have a lower dividend yield of 3% but the stock is undervalued by around 15%. Following its asset swap with E.ON the group is now renewables leader, the second global leader in offshore wind. So, that provides visibility on cash flows and on dividends. I expect 7% annual growth in dividends through 2024.

Black: Okay. So, moving away from the good group, what are some of the stocks that you are not particularly keen on right now?

Fulop: So, within the bad group there's National Grid. I think it will at some point to reduce the dividend to maintain their current investment grade credit rating. Now, they have to maintain their dividend they use as scrip dividend. But given with the scrip I expect that by maintaining current dividend policy of rising in line with inflation it will be too much to keep their credit rating or to avoid any downgrade and protect their credit rating they will have to cut their dividend but that s not priced in because the dividend yield is around 4%, 5%.

Black: Tancrede, thank you so much for your time. For Morningstar, I'm Holly Black.

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
Enel SpA5.90 EUR0.14
National Grid PLC1,039.50 GBX0.43Rating
RWE AG Class A30.83 EUR0.26

About Author

Holly Black  is Senior Editor,


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