Morningstar | Iberdrola's Free Cash Flow to Deteriorate Through 2022; Dividend Floor Positive
Iberdrola lowered 2018-22 free cash flow in its updated 2022 outlook as increasing investments offset the higher EBITDA target. As we already wrote, we plan to increase our fair value estimate by a mid-single-digit rate following the publication of 2018 results last week. For the moment, we reiterate our fair value estimate of EUR 6.50 per share along with our no-moat, stable trend ratings. Among diversified Southern European utilities, we prefer Enel and Naturgy.Iberdrola increased its 2018-22 investment forecast from EUR 32 billion to EUR 34 billion, chiefly due to renewables. It left its 2018-22 funds from operations target unchanged at EUR 42 billion, involving free cash flow through 2022 around EUR 2 billion lower than previous guidance. However, taking into account achieved 2018 free cash flow, the new targets involve cumulative free cash flow through 2022 above our estimates. The group increased its 2022 EBITDA target from EUR 11.5 billion-12 billion to above EUR 12 billion and its net income target from EUR 3.5 billion-3.7 billion to EUR 3.7 billion-3.9 billion. This is well above our respective estimates of EUR 11.2 billion and EUR 3.4 billion, which we plan to increase on higher investments and a stronger dollar since we last updated our model. Still, among the the plan's underlying macro assumptions, Spanish power prices and carbon prices are above current forwards, which we will factor in. Therefore, our new free cash flow targets should be below guidance.
Iberdrola improved its dividend policy. Management increased the dividend upside with the 2022 EUR 0.40 per share figure now set as a floor rather than a target. Furthermore, the group set dividend floors in every year through 2022 guaranteeing a compound annual growth rate of 3.3%. This is a positive signal as the dividend floor cancellation last year disappointed investors. The group maintains its payout of 65%-75%, so it will pay the higher of the floor and the payout-based dividend.
By setting a dividend floor for the next four years, Iberdrola kind of aligns its policy with Enel, which set a dividend floor through 2021 guaranteeing 9% annual dividend growth, higher than Iberdrola. Enel currently yields 5.3% versus 4.8% for Iberdrola.
Iberdrola is a holding company. Through its subsidiaries, Co. operates in four segments: network business, which includes all the energy transmission and distribution activities, and other regulated activity originated in Spain, the U.K., the U.S. and Brazil; deregulated business, which includes electricity generation and sales businesses as well as gas trading and storage businesses carried on by Co. in Spain, Portugal, the U.K. and North America; renewable business, with activities related to renewable energies in Spain, the U.K., the U.S. and the rest of the world; and other businesses, including the engineering and construction businesses and the non-power businesses.
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