Welcome to Morningstar. I'm Holly Black. With me is equity analyst Tancrede Fulop. Hello.
Thanks for joining us. Hello, Holly. Thanks for having me.
So, one of the sectors you look at is utilities, so that's energy firms and the like. How are
they being affected in the current sell-off? They tumbled basically in line with the market,
despite being a bit less exposed than other sectors. This is because they were a bit overvalued
before the market fall. And so, in terms of impact, there's little impact. So, if you
look at the valuation of the sector, you have an impact of the downstream part of the value
chain, which is the retail supply of energy to households and business. And over the last
weeks the consumption of gas and electricity declined between 10% and 20% in Western European
countries. So, you have an impact on that part of the business and also, you will have
an increase in bad debt provisions because customers are not able to pay.
And if you look at the upstream part of the business, power generation, its impact this
year is limited because the power pollution is mostly hedged in advance at high power
prices, but you could have an impact in the next year because since the beginning of the
crisis power prices have tumbled quite significantly. Then companies with exposure to E&P like Centrica,
there is a huge impact because of the collapse of oil and gas prices. LNG also is massively
affected because of the drop of gas prices. And finally, you have an impact for waste
management companies like Veolia, (indiscernible) and Suez, because you have a massive drop
of industrial pollution. So, we have much less waste from industrial companies.
So, one good thing about these businesses is they're quite defensive because we still
need gas and electricity regardless of what's happening. And so, that makes them quite popular
with income investors because historically they've paid quite reliable dividends. But
what is the outlook for those dividends now if these companies are coming under pressure?
Yeah. As you mentioned, it's theoretically a defensive sector. But unfortunately, over
the last days, there was a wave of dividend cuts. And this reflects more government pressure
than balance sheet pressure. A good example of that is EDF and Engie, which cut their
dividend yesterday. It's because the French state is a shareholder of the companies and
the French state asked every companies in which it holds a stake not to pay any dividend
this year. Then, in Germany, the German government asked every listed companies not to pay any
dividends to be eligible to receive financial support. So, that puts dividend of E.ON and
RWE at risk. Centrica also cut its dividend for this time which is very weakly positioned
that reflects balance sheet pressure and I expect 2021 dividend to be cut too.
That said, Veolia also halved their dividend. So, yeah, finally, so the sector is supposed
to be defensive, you had cuts and I expect potentially more cuts.
Okay. So, you mentioned quite a few companies there where the dividends have already been
cut or are about to be. Are there any stocks in this sector that you still like?
Yeah. Against the current uncertain backdrop, I will go for (indiscernible) which means
business and geographic diversification and exposure to midstream, so (indiscernible)
end to really reverse. So, I like Enel. Enel maintains its dividend plans for 2022, also
ready to achieve its 2020 guidance and has high exposure to renewables. It's probably
one of the global leaders and high exposure to energy networks for which you see impact
from COVID will be limited. Otherwise, there is also Orsted, which is close to my fair
value estimate, is a global leader in offshore wind and we'll benefit from any pullback to
get entry points in Orsted. Oh, that's a great point. This could be the
time to get into renewable energy. Tancrede, thank you so much for your time. For Morningstar,
I'm Holly Black.