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September 22, 2013 4:37 pm
Germany’s utilities are suffering the corporate equivalent of radiation sickness. As the fallout continues from the country’s radically counter-intuitive energy policy – shutting down nuclear power and pouring subsidies into alternative energy, thereby undermining conventional power generation – the sector is floundering. The latest evidence is RWE’s decision last week to cut its dividend by half and to reduce its payout ratio from 50/60 per cent of net income to 40/50 per cent. Eon cannot be far behind.
RWE is in a particular bind. Its ratio of net debt to forecast earnings before interest, tax, depreciation and amortisation of nearly four times is putting severe strains on its balance sheet. The dividend cut is a sign both that the earnings outlook is dismal in the medium term, and that RWE cannot maintain its current debt servicing obligations, dividend payout ratio, and credit rating all at the same time. One of them had to give. Shareholders will take the pain this time. Fair enough.
RWE has maintained its earnings guidance for 2013. But there will have to be further cost-cutting, and perhaps a cut in capital expenditure, to maintain balance sheet equilibrium. In the meantime, RWE’s net debt/ebitda ratio is unlikely to fall to 3 or below any time soon.
Cutting the dividend does not rule out RWE’s having to raise more equity. The dividend and the poor earnings outlook have combined with fears of a need for more equity to keep RWE’s shares underperforming chronically this year, trailing behind the wider German market and also behind Eon. Raising equity would be tricky – it is the last thing a group of municipal shareholders owning 25 per cent of the utility want to see.
Its shares are up 20 per cent since the start of September, but it is an unconvincing rally. RWE needs a robust plan with its third-quarter numbers next month to show it can keep the financial lights on.
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