Spanish utility company Iberdrola (IBE) is a leading global energy group. It produces electricity from renewable and conventional sources, trades electricity & gas in wholesale markets, transmits and distributes electricity worldwide. The company carries out activities mainly in Spain, Portugal, UK, US, Mexico and Brazil. It supplies electricity to 100M people.
The company has the following divisions:
- Networks – 38% of total revenue in 2021. The transmission and distribution of energy activities in Spain, UK, US and Brazil. It delivers electric power from the production centers to end users through power lines, substations and other facilities.
- Generation and Retail – 58% of revenue. The electricity generation (the construction and operation of generation plants) and supply in Spain, Portugal, UK, Mexico and Continental Europe.
- Renewables – 15% of revenue. The generation of electricity from renewable energy sources – wind, hydroelectric, solar thermal, biomass, etc.
The company is committed to clean energy and plans to double the renewable capacity by 2025 to 60 GW and then by 2030 to 95 GW.
In 2021 Iberdrola acquired Brazilian utility company CAB Distribuiçã, French wind farms company Aalto Power and three wind farms in Poland.
Dividend Revenue Profitability 
Financial Strength Investment Case
Dividend
| Dividend | Dividend Yield | Growth p.a. | PayOut Ratio |
| EUR 0.42 per share | 4.3% | 5Yrs: 7.7% 1Y: 5% | 72% |
| Dividend Policy
Iberdrola aims to pay in dividends between 65% – 75% of the net profit. In the 2020 – 2025 Plan a floor of dividend of EUR 0.40 per share was set for 2020 – 2022. |
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| Sustainability
Payout ratio of 72% is within the range set by the company policy. So dividend is well covered by the net profit. Retained cash flow amounted to EUR 8B in 2021. It easily covers dividend payment of about EUR 2.7B for 2021. |
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| Future Growth Estimate
In the past a dividend used to grow in smooth way in line with EPS growth. It could be expected that the growth would continue in the future alongside with a future EPS growth. |
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Revenue
| Revenue | Revenue Growth | Revenue growth in 2021 | |
| EUR 39B
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5 Years Growth 6%
1 Year Growth 18%
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By divisions:
Generation and Retail +24% Renewables +45% Networks +15% |
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| Revenue has been in uptrend in recent years with robust average growth, except challenging 2020. In 2021 revenue jumped 18% due to positive contributions from Networks assets in US and Brazil, higher installed renewable capacity and the increase in renewable production. | |||
| Outlook
According to 2020 – 2025 Plan the company will continue to invest across the electricity value chain with focus on renewable capacity. It will invest EUR 75B by 2025 in all areas of activity. 51% of it will go to the renewable business. The investments will reach EUR 150B in 2030. These investments should support future revenue growth of Iberdrola. |
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Profitability
| Profit | EPS Growth | Net Profit Margin | ROE | |
| EPS EUR 0.585
Net Profit EUR 3.9B |
5Y Growth 6.8% p. a.
1Y Growth 6.4% |
9.9%
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6.9%
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| Operating profit
In 2021 operating profit increased by 32% and EBITDA was up 19.6% to EUR 12B. Renewables’ EBITDA increased by 113% while Generation and Retail reported 65% decline over year. Generation and Retail division has had higher supply costs due to higher gas and CO2 prices while selling prices were mostly fixed. |
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| EPS growth assumption
EPS has grown in consistent and smooth way in the past. In the future the company intends to boost operating efficiency through digitalization and standardization of processes. We assume that the growth would keep the same pace in the future. |
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Financial Strength
Company Capital Structure
In EUR B
| Year | 2020 | 2021 |
| Equity | 47.218 | 56.126 |
| Cash & cash equivalents | 3.427 | 4.033 |
| Debt | 41.515 | 43.574 |
| Adjusted Net Debt as defined by the company | 35.14 | 39.12 |
| Debt/Equity | 88% | 78% |
| Sustainability
Debt-to-Equity ratio is not low though is down over year due to higher equity value. The amount of debt is higher over year due to substantial investments made in 2021. Debt is not well covered by operating cash flow as the operating cash flow is 18.6% of the debt. Iberdrola has long term credit rating BBB+ with stable outlook by S&P rating agency. |
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Investment Case
The estimate of future stock price and investment returns based on P/E ratio
| Assumptions of dividend and EPS growth over the next 5 years | ||
| Dividend could grow at 6% per year in the next 5 years period. So the total dividend income over the next 5 years would amount to EUR 2.51.
We could assume EPS growth of 6% p.a. Then EPS in 5 years will be EUR 0.78 per share. |
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| Projected stock price | ||
| Average P/E over the last 5 years (16) multiplied by EPS in 5 years = 16 x EUR 0.78 = EUR 12.53 | ||
| Future Returns Based on the Assumptions | ||
| Stock price upside potential 32% from the current price EUR 9.5.
Overall return on investment 58% (includes the expected dividend income over the next 5 years and dividends are not reinvested) Compound Annual Return on Investment 9.6% |
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| Electricity is at the epicenter of the energy transition due to the need to further decarbonize economies and the need for new energy services. That together with Iberdrola’s investments in all areas of activity and improving operating efficiency should lead to a sustainable growth in profits. Iberdrola belongs to defensive industry and offers attractive risk-return trade-off at the current valuation. | ||
Disclosure:
I am long IBE.
Notes
Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.