EUR 850.00 For Business Accounts Only

Morningstar | Enel's Solid Earnings and Dividend Growth Should Drive a Reduction in the Discount to the Sector

Enel has been suffering from high leverage stemming from the acquisition of Endesa at the top of the cycle in 2008. Sovereign debt crises in Spain and Italy increased pressure on Enel's shares and bonds, and economic doldrums in these countries led to the implementation of adverse regulation for utilities, which hit Enel’s earnings and led to a dividend cut. Since 2014, the regulatory and economic backdrop in Enel’s core markets has stabilised, and a new strategy aiming to boost organic growth and streamline the group organisation has been implemented. The management team implemented cost-cutting measures and increased growth investments in regulated networks and renewables. The group strengthened control on its fastest-growing Latin America and renewables businesses by delisting Enel Green Power in 2016 and buying out Latin America activities from its subsidiary Endesa. On the bottom line, Enel has increased its dividend by 15% per year since 2014. The current 2019-21 business plan points to strong earnings growth fueled by growing investments in renewables, infrastructure, and new activities and cost-cutting. At year-end 2018, Enel had 39 gigawatts of installed renewable capacity, the highest among European utilities. Planned investments in solar and wind will increase capacity by 9 GW by 2021. Our earnings estimates are slightly below the group's targets due to our cautious stance on energy service growth and European carbon dioxide price estimates above the business plan's assumptions. Still, solid EBITDA growth should boost free cash flow, enabling 9% annual dividend growth through 2021, secured by a floor every year. Enel is the only utility in Europe to have a dividend floor through the next three years, reflecting strong earnings visibility and an improving business backdrop.A high-growth dividend could entice dividend seekers. Furthermore, high earnings growth and continuing simplification of the group organisation in Latin America, through reduction of the number of companies and minority buyouts, should drive a reduction in the historical discount to the sector average. This implies appeal to value investors as well as growth investors.