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A first look suggests Iberdrola is a reasonably priced dividend stock [ClearOnMoney]
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A first look suggests Iberdrola is a reasonably priced dividend stock

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Commentary

A first look suggests Iberdrola is a reasonably priced dividend stock

7 Mar 2013 by Jim Fickett.

While waiting for the Fed to finish blowing credit bubbles, and for the US stock market to return to earth, it is useful to look for bargains in Europe, where many markets are down due to the recession.

Iberdrola is a large electric utility, based in Spain but with global reach, which caught my eye due to

  1. its involvement in some large carbon-free energy projects, such as a new nuclear plant in the UK,
  2. a high dividend yield, at 6.8%, and
  3. a depressed price (about half the 2010 level) due mainly to the severe recession in Spain (which will, someday, be over)

Iberdrola took its present form through a long series of mergers and acquisitions. After two large acquisitions in 2007 and 2008 the activity slowed, so that we have a record of about 5 years with the company in more or less its current form. Only the annual reports of 2008-2012 are available on the company website, but older reports can be found in various places with the help of Google. Here is an 11-year history of net income, free cash flow, and book value:

Note that net income has been quite stable, at about 2.8 billion euros, since the last major acquisition in 2008. Using the latest net income number, 2.84 billion euros, as an estimate of sustainable profits, the P/E ratio is about 8.6. That seems quite a reasonable price.

Free cash flow is all over the map, because much of the available cash was used to expand rather than maintain the business. In a business where capital expenditures are made only for maintenance, and over the long term, net profit and free cash flow should average about the same, since they are both intended to measure the same thing, just with different accounting frameworks. In Iberdrola, cumulative net profit over the eleven years shown is about 30 billion euros greater than cumulative free cash flow. This suggests that about 30 billion euros were invested in growth, above and beyond maintenance. Over the period shown the book value of the company increased by about 26 billion euros. There is considerable slop in these numbers; 26 is close enough to 30 to suggest that cash flow has indeed been used reasonably well, on the whole, to increase shareholder value.

All this suggests that IF the business is in reasonable shape, the company is not overpriced. There remains that big if. Some questions:

  • Spain's recession will eventually pass, but Spain has made a major policy reversal on green energy, first giving overly generous subsidies and then taking them away. Has that caused Iberdrola permanent damage?
  • In Brazil the government is trying to hide inflation by imposing price caps on electricity. How badly will this affect Iberdrola's Brazilian subsidiary?
  • Did Iberdrola overpay for acquisitions during the boom? And is current debt excessive?

For the moment I am hopeful that Iberdrola might be a reasonably priced dividend stock, something that is quite difficult to find currently in the US.