EUR 850.00 For Business Accounts Only

Morningstar | Veolia to Continue Delivering Solid Earnings and Dividend Growth Despite Likely Top-Line Slowdown

Veolia Environnement is the world's largest water company. Its business includes the treatment and distribution of water, which makes up more than 40% of the group's revenue. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which wiped out profitability. We believe the worst is over and the rebound since 2016 will persist because continuing cost-cutting will offset structural pricing pressure. Veolia’s other main business is waste management, which accounts for about 40% of turnover. This business is more cyclical and was hit by economic crises in Europe over 2009-13. Since 2015, the economic recovery in Europe has boosted waste volumes and enhanced margins. The group intends to increase the profitability and structural growth of this division by developing new businesses, notably in a circular, or recycling, economy. Veolia’s third main business is energy, to which peer Suez has no significant exposure. This business makes up 20% of the turnover and encompasses energy services, heating and cooling networks, and electricity. This is a much more defensive than waste management. However, the weight of municipal clients limits pricing power. Since 2011, Veolia’s top management succeeded in halving its debt, driving over EUR 1.6 billion in costs out of the firm’s businesses, and increasing returns on capital above those of its peer Suez, by refocusing the group. After coming in below market expectations in 2016, organic revenue grew strongly in 2017 and accelerated to 4.7% in 2018. We anticipate revenue growth to gradually wane through 2023 and include one year of zero revenue growth to take into account the cyclical nature of the business mix. Altogether, we expect average revenue growth of 2.2% through 2023. Continuing cost-cutting will remain the main driver of profitability. Solid free cash flow generation provides headroom to increase the dividend in line with results and make bolt-on acquisitions. This reflects better stewardship than its peer Suez, which has more limited financial headroom after the costly acquisition of GE Water.