RWE to Cut Dividend in Face of Shrinking Power Generation

RWE AG, Germany’s second-largest utility, reduced dividend payments after the country’s shift to renewable power curbed profit from gas- and coal-fired plants. The shares fell.

RWE will pay 1 euro ($1.35) on each common and preferred share at the 2014 annual meeting, half of what it paid in 2013, it said in a statement yesterday. RWE plans to cut the portion of recurrent net income earmarked for dividends to 40 percent to 50 percent from a previous target of 50 percent to 60 percent.

“Given RWE’s dividend policy in the past, we need to assume the 1 euro is to be kept in coming years,” said Ingo Becker, an analyst at Kepler Cheuvreux who recommends selling the shares. At 1 euro, a 40 percent to 50 percent payout would imply recurrent net income of 1.2 billion euros to 1.5 billion euros next year, he said. That’s less than the 1.74 billion-euro average estimate of 22 analysts in a Bloomberg survey.

RWE is cutting the dividend “in light of the deterioration in the earnings prospects of the conventional electricity generation business,” the Essen-based company said yesterday.

The shares sank 3.9 percent in Frankfurt, the most in five weeks, to close at 24.695 euros. Trading volumes were almost three times the three-month daily average. Larger German competitor EON SE was little changed at 13.515 euros.

Profit Hurt

Weak European electricity demand and increased output of alternative energy has dragged down power prices, narrowing margins at gas and coal-fired plants. RWE said in August it will shut 3,100 megawatts of capacity in Germany and the Netherlands, about 7 percent of its total in northern Europe, after operating profit for conventional power generation fell 62 percent to 690 million euros in the first six months of the year.

The company’s dividend decision also hurts municipal shareholders. Dortmunder Stadtwerke AG, which says it holds 3.7 percent of RWE, will probably receive about 19.5 million euros less for 2013 than last year, Chief Executive Officer Guntram Pehlke said today in an e-mailed statement. He called for changes to the “wrong-headed energy-market policies of the federal government” after German elections on Sept. 22.

Essen has planned its 2014 budget with a dividend of 2 euros, Lars Klieve, the city’s treasurer, said in a phone interview. “Now 19 million euros are lacking.”

Chancellor Angela Merkel’s order to close all nuclear reactors by 2022 following Japan’s Fukushima disaster has led RWE and EON to reduce costs and sell assets.

Earnings Outlook

The dividend cut “makes sense for RWE because they highlighted once again before the elections that something has to happen regarding” the clean-energy subsidy system, said Thomas Deser who manages more than 2.5 million RWE shares at Union Investment GmbH, according to data compiled by Bloomberg. “They have probably bought the approval of the employees’ representatives for further job cuts,” he said by phone.

RWE’s “balance sheet remains overly stretched,” even with the dividend cut, analysts at UBS AG said.

The utility has forecast 2013 operating profit of about 5.9 billion euros and recurrent net income, the measure used to calculate the dividend, of about 2.4 billion euros. Based on that profit measure, 1 euro represents a payout ratio of 26 percent.

RWE’s decision “is driven by a cautious outlook on thermal-power profits and political-intervention risks,” Bloomberg Industries said today. Utilities with a high proportion of thermal-power generation, including EON, may also choose to review their dividend policies, it said.

RWE shares have fallen 21 percent this year, compared with a 14 percent gain in Germany’s benchmark DAX Index.

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