Iberdrola to Keep Dividend as Galan Resists Atomic Tax
Iberdrola SA (IBE), the worst performer among European utility stocks in 2012, will maintain its dividend by cutting costs and increasing foreign profit as it begins to reduce debt as much as 20 percent, the chairman said.
To avoid new expenses, Spain’s largest utility will fight a government plan for a so-called windfall profit tax on nuclear energy, Ignacio Galan said in an interview yesterday. The moves help ensure it pays the 33.7 euro-cent dividend next year, which currently gives a 9.5 percent yield, he said.
Prime Minister Mariano Rajoy is struggling to wring more money from energy companies as he tries to avoid a second bailout. That has driven yields up and share prices down for domestic power utilities. Galan, 61, said he would sue the government should it levy a new tax on hydropower and atomic energy because singling them out for punishment among various types of generation is illegal.
“We already have about 300 legal actions against this government, so why not?” Galan said. “European legislation will not allow different taxation for different technologies.”
Iberdrola increased first-half profit from outside Spain by 74 percent to 1.36 billion euros ($1.75 billion). That offset a 44 percent slump in earnings from its home market after Spain cut payments for power businesses by 1.7 billion euros this year, hurting Bilbao-based Iberdrola and rivals Endesa SA (ELE) and EON AG. Domestic power demand has fallen with Spain’s recession.
“Our dividend is more dependent on our international business than the Spanish one,” Galan said. “2012 is going to be a very good year.”
The stock rose as much as 2.9 percent in Madrid today and traded 2.7 percent higher at 3.66 euros at 3:49 p.m. local time, outpacing the benchmark Ibex’s 1 percent gain.
Iberdrola, whose net debt is about 27.7 billion euros, according to data compiled by Bloomberg, plans to reduce borrowings over the next two years by 15 percent to 20 percent, Galan said, without commenting on possible asset sales. He said any new Spanish regulations that erode income will be matched by cost cuts, to defend the company’s dividend and shares.
“Iberdrola has got to mind its debt levels,” said Shai Hill, a power industry analyst at Macquarie Capital Europe Ltd. in London. New rules that curb Spanish earnings would raise the question of “What are they going to sell?” Hill said. “They’ve probably got to do something pretty dramatic, like exit Latin America, exit the U.K. or list Scottish Power,” the U.K. unit.
The company has already eliminated 400 jobs, 10 percent of the workforce of its regulated business in Spain, and lowered subcontracting by 50 percent, after the government chopped income from its electricity transmission business in March.
“If the government reduces our revenue, we will respond by reducing costs,” said Galan, who was trained as an engineer. “Every action has a reaction.”
The stock, down 26 percent this year, has been depressed by a “substantial overhang,” or potential sell-off, by shareholder Actividades de Construccion & Servicios SA, UBS AG said in an Aug. 30 note. The construction company placed much of its holding, which was almost 15 percent, with an investment bank in April, UBS said, rating the stock a buy.
Iberdrola, which sold 750 million euros of 2017 notes this week, is looking to bolster its balance sheet as the government’s financial problems disrupt access to financial markets for Spanish companies.
The yield on the utility’s October 2018 bonds reached 7.35 percent in June and had dropped to 4.8 percent by yesterday, according to Bloomberg data. The yield fell to 4.47 percent today.
Iberdrola, also the world’s biggest owner of wind parks, will earn enough in foreign markets to defend its payment to shareholders, Galan said. The company’s Scottish Power unit is the third-biggest power distributor in the U.K., and its 2008 acquisition of Energy East Corp. made it the biggest Spanish investor in the U.S.
“International profits are of course helpful, but 2013 will be far less positive in the international business than 2012 and this will bring in our view pressure on the dividend again,” Javier Garrido, a power industry analyst at JPMorgan Chase & Co. in Madrid, said in a note. “Iberdrola management would make the message more credible by re-basing the dividend to a more realistic level.”
Industry Minister Jose Manuel Soria has said he plans to tap power companies to close a 6 billion-euro annual shortfall in the country’s electricity system.
The struggle to close the so-called tariff deficit, which has generated more than 24 billion euros in debt that’s guaranteed by the government, opened a rift in Rajoy’s government last month when Budget Minister Cristobal Montoro blocked Soria’s plans to raise 2.6 billion euros a year in new taxes on power companies.
That plan would have reduced Iberdrola’s net income by 440 million euros a year, JPMorgan Chase & Co. said in a July 12 research report.
“The government is always making noise and doing nothing in terms of the energy reform,” Galan said, when asked about the possibility of a new windfall profit tax on nuclear and hydropower. “In the worst case, we would have to pay out the money and then get it back through the courts.”
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