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.

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.

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.

   Revenue

Revenue Revenue Growth Revenue growth in 2021
EUR   39B

 

 

 

5 Years Growth   6%

1 Year Growth    18%

 

 

By divisions:

Generation and Retail     +24%

Renewables                      +45%

Networks                          +15%

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.

   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%

 

6.9%

 

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.

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.

 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.

   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.

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%

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.

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