EUR 850.00 For Business Accounts Only

Morningstar | A hefty investment plan will not materially improve Iberdrola's low return on capital.

Iberdrola is the biggest Spanish utility and one of the biggest in Europe. It is the European utility with the largest exposure to the U.S. due to its wind development and the acquisition of UIL in 2015. Its U.S. assets are now grouped in 81.5%-owned Avangrid. Iberdrola boasts the largest wind portfolio in the world with 16 GW of capacity mostly in Spain, the U.S., and the U.K. The group invests heavily in wind farms, aiming to reach 20 GW of capacity in 2022. Investments are focused on offshore wind farms in the U.K., and onshore in the U.S., Brazil, and Mexico. In all, renewables will be the fastest-growing segment; on our estimates, it will account for 27% of the group's EBITDA in 2022 versus 22% today. Revenue tends to be relatively secure through purchase power agreements. Increasing competition at new auctions drives declining prices for new capacity PPAs, in turn dampening return on capital.Networks form the largest division, weighing more than 58% of EBITDA. Around 60% of the division's EBITDA comes from Spain and the U.S., around 20% from the U.K., and the rest from Brazil. Spanish networks' EBITDA should decrease as of 2021 due to cuts in regulated returns. Returns are higher in the U.K., the U.S., and Brazil. In all, investments will be focused on those countries, driving a 2017-22 EBITDA CAGR of 6.5%.Generation and supply account for 22% of the group's EBITDA. Commissioning of 4.8 GW of new CCGTs in Mexico, whose earnings are secured through capacity payments, will support the division's profitability through 2022.We appreciate the group's business mix, which is focused on networks and renewables with a strong footprint in the U.S.; this should drive a 7% EPS CAGR over 2017-22. Still, growth will be fuelled by hefty investments funded by increasing debt, while interest rates could rise due to normalisation of monetary policies. Also, we dislike that the firm's return on capital is well below that of peers and the weighted average cost of capital. We forecast it to modestly improve to 5.5% in 2022. The dividend currently provides a yield of about 4.9%, and we project 4.6% annual growth through 2022.