Where can investors get a decent income without too much risk? One option is utility stocks – the ailing euro has created several bargains for British investors. Enter RWE, the number-one power producer in Germany, number two in the Netherlands, and number three in Britain, generating and distributing electricity and gas to 24 million customers.
The firm reported 2009 turnover of €47.7bn. It’s able to offer a 6.5% yield and afford chunky investments in its core coal (59%), nuclear (19%) and gas-fired (18%) power stations and in leading-edge renewable solar, tidal and wind energies. For instance, as part of a £2bn consortium, the firm recently snaffled up a prestigious contract to build and run a 160-turbine windfarm ten miles off the north Wales coast. The project is expected to be completed in 2014 and should provide enough electricity for 400,000 homes.
Clean energy is a big opportunity for RWE because the European Union (EU) plans to slash its greenhouse-gas emissions by up to 95% by 2050. RWE intends to have 75% of its generating assets by 2025 “zero or low carbon”, up from 41% today. That will boost profitability, as it will be able to close less-efficient plants and purchase fewer carbon credits. It may even be able to charge more as demand increases with consumers switching from petrol-based to electric vehicles and heating systems.
RWE (DE:RWE), rated a BUY by Equinet
The City expects sales, underlying earnings per share (eps) and the dividend to be €54.6bn, €7.0 and €3.7 respectively for 2010. That puts the shares on a price-to-earnings ratio (p/e) of 8.1. The balance sheet is secure, with net debt equating to only one-times cash profits. However, there are €15.6bn of non-interest bearing legacy costs relating to future pension, nuclear decommissioning and mining obligations. So I’d rate the stock on a through cycle earnings before interest, tax, depreciation and amortisation (ebitda) multiple of six (assuming sustainable margins of 20%). Adjusting for RWE’s liabilities, that suggests a price of about €75 per share.
So what could cause a black out? RWE is exposed to the volatile commodity and power markets and operates in a heavily regulated industry. Three weeks ago the German parliament announced a new €2.3bn per year nuclear-fuel tax that will affect the earnings of all generators up to 2014 (although this hit is likely to be offset by the government’s plans to extend the lives of nuclear facilities).
RWE may not make you a millionaire overnight, but I’m confident it won’t disappoint. First-half results are scheduled for 12 August.
Recommendation: BUY at €57
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments