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The utilities sector is usually one of dividend investors' favorite because these companies have stable businesses, with good profitability and cash flow generation capacity. Therefore, they regularly pay part of their profits as dividends, and usually are safe. In the U.S., the utilities sector (IDU) offers a yield of about 4% on average, which is quite good. However, there are higher-yielding stocks in foreign utilities, like Energias de Portugal (OTCPK:EDPFY) that currently offers an yield above 7%. This yield is also above some major American utilities such as Duke Energy (DUK) which yields 4.5%, or American Electric Power Company (AEP) at 4.3%.

Energias de Portugal is a Portuguese-based company that generates, supplies, and distributes electricity and gas in Portugal and Spain. Moreover, through its subsidiaries the company is involved with electricity distribution, generation and supply in Brazil, and wind power promotion, construction and operation in 11 countries. Its wind-power subsidiary EDP Renováveis is one of the world's largest players in its industry. The company was mainly owned by the Portuguese state until 2011, when the state sold its remaining 21% stake in EDP to China Three Gorges, a Chinese state-owned company. Iberdrola (OTCPK:IBDRY) is the second-largest shareholder with 6.79% of its capital. The company's primary listing is in Lisbon, but it is also traded in the U.S. in the OTC market. Energias de Portugal has an ADS (American Depositary Shares) program, with each ADS representing ten ordinary shares. Its market capitalization is above $9 billion.

Even though Energias de Portugal is exposed to countries with a weak macroeconomic backdrop like Portugal, its business has a low-risk operational profile given that around 91% of its EBITDA is derived from long-term contracts and regulated activities. In the last year, the company had more than $21 billion in sales an increase of 11.9% from the previous year. However, its EBITDA declined by 3.4% to $4.8 billion mainly due to tariff deviations in Brazil. Its EBITDA margin was 22.2%, which is still a good level. EBITDA from wind operations rose by 17%, backed by portfolio expansion, stronger wind resources and higher prices. Portugal represented 46% of EDP's EBITDA in 2012, Spain accounted for 25%, Brazil for 15%, U.S. for 9%, and the Rest of Europe (excluding Portugal and Spain) for 5%.

Regarding its dividend, Energias de Portugal pays an annual dividend. Since 1997, when it was listed, the company has never cut the dividend. Over the past 5 years, the average annual growth was above 7%. However, the dividend related to 2012 earnings was flat at €0.185 ($0.244) per share for the first time in years, reflecting a more challenging operating environment. The payout ratio was 67% in 2012, an increase from the previous years when it was always below 60%. Given that Energias de Portugal has a stable business, this payout ratio is acceptable. Going forward, the company's guidance is for a payout between 55%-65% of recurrent net income, with dividend per share from 2011 acting as a floor (€0.185/share).

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Despite its relatively stable business profile and apparently safe dividend, the company's high yield is not without risks. The company indebtedness is high and continued to increase in 2012. Net debt was slightly higher than $24 billion in 2012, an 8% increase from 2011. This resulted in more balance sheet leverage and deteriorating credit metrics. Its net-debt-to-EBITDA ratio increased 0.5x during the past year, from 4.5x to 5x at the end of the year. The company is committed to reduce this debt level, and has already sold some assets during the past few months, which raised almost $800 million in cash. Its goal is to achieve a net debt/EBITDA ratio below 3x by 2015. Moreover, its liquidity was about $5 billion at the end of 2012, enabling the company to cover its financing need beyond 2014.

Conclusion

Energias de Portugal offers a very compelling dividend yield above 7%. Its stable business provides safety that it should be sustainable over the medium to long term. Nevertheless, its high debt is worrisome and a faster deleveraging process would be positive for the company's dividend sustainability. Despite this risk, Energias de Portugal appears to be a good dividend investment also supported by a undemanding valuation, given that the company is trading at only 9 times its last year's earnings.

Source: Buy This Utility For Its 7.25% Yield