Veolia doesn't make money

3 Jan 2013 by Jim Fickett.

Veolia is often recommended as a water investment, as it is a very large water utility (employing over 300,000 people). Headquartered in France, most of its business is in Europe. The stock is down 60% in the last couple years, and I love bargains, so thought I'd take a look.

After only a short look, I think Veolia is not very interesting.

  • Average free cash flow 2002-2011 is -€61m/year. Average net income is better, at +€175m/year. But even at the current depressed stock price, that gives a P/E of 27.
  • Investors like the generous dividend but, given that the company has had negative free cash flow, on average, and that it is divesting assets to reduce excessive debt, clearly the dividend (€365m/year) is unaffordable.
  • Although it is true that Veolia has a large water business, the water division provides less than half of revenue, and the company is extremely complex (the annual report is 500 pages).
  • The previous CEO greatly expanded the company, building up unsustainable debt, and the current CEO is having to try to clean up the mess, at the same time that many European customers, hit by a bad recession, are unable to pay their utility bills.

Some of the problems are no doubt temporary, but it is a serious warning sign, for the overall quality of the business, that the company has not been able to generate positive free cash flow over the last decade.