GDF Suez (OTCPK:GDFZY) is an European utility offering a very interesting dividend yield above 8%, and is trading at only 13x forward earnings. This compares quite well with fundamentals at U.S. peers and may be therefore a good alternative to utilities like Southern Company (SO) or American Electric Power (AEP), which trade at higher valuations and offer lower dividend yields. GDF Suez has a market capitalization of about $57 billion, and is traded in the U.S. in the over-the-counter market.
GDF Suez is the incumbent gas utility in France and electricity utility in Belgium, as well as a world leader in liquefied natural gas [LNG] and natural gas supply. The current company results from the merger of Gaz de France with Suez in 2008, forming one of Europe's leading utility companies. Nowadays it has about 138,000 employees in almost 50 countries. GDF Suez operates under six business segments: Energy International, Energy Europe, Global Gas & LNG, Infrastructures, Energy Services, and Environment. The French state owns a 34.7% stake in GDF Suez and is obliged to hold at least 33%. GDF Suez, in turn, has a 34% interest in environmental services group Suez Environment (OTCPK:SZEVY), which it recently started to account under the equity method following the loss in control.
At the end of 2012 GDF Suez had about 116 gigawatts [GW] of installed capacity, of which about 40% is based in growing markets. The company's strategy is to grow in emerging markets, where it is building the vast majority of its new capacity. Of its 10GW under construction about 80% is based in growing markets. Its European generation fleet is less carbon-intensive than most of its peers, with gas accounting for 50% of its generation capacity, and coal for only 10%. The company operates under long-term contracts, especially in international markets where about two thirds of its gross capacity is operated under long-term contracts. In Europe, about 30% of its capacity is operated this way. Compared to its closest peers, GDF Suez boasts a larger portion of regulated assets within its mix, and has a cleaner generation fleet.
GDF Suez has also a good geographical diversification, which is much wider than most of other European utilities. However, Europe altogether still accounts for about 80% of its revenue, and about 75% of its EBITDA. The company is well positioned in the central European power markets of France, Germany, and Benelux. By business line, Energy Europe and International represents about half of the company's EBITDA, followed by Infrastructures with a 18% weight, and Global Gas & LNG accounting for 14%.
The acquisition of International Power in 2011 has boosted GDF Suez's geographical diversification out of the slow-growth developed countries and compared to major European peers like Electricite de France (OTCPK:ECIFY) or E.On (OTCQX:EONGY) it is more exposure to markets outside Europe, given that during the past year it generated about $26 billion in revenues from operations outside Europe. Moreover, the company have been selling some European assets during the past few years, reducing the proportion of mature markets in its business mix.
GDF Suez has been penalized by increased political and regulatory risk following the election of Hollande's government in 2012. The French government has been reluctant to allow natural gas prices to rise in line with their cost, affecting GDF Suez's profitability. The Belgian government's nuclear tax and other restrictions on the operation of power assets in the country has also been a headwind for the company. To address weakness in power markets in Europe, GDF Suez has launched a cost-cutting plan which includes the rationalization of the generation fleet in Europe, expecting a gross profit contribution of $4.6 billion in 2015. Moreover, it is also cutting exposure to merchant activities and increasing regulated activities to 65% of net income in 2015, from 51% in 2011.
Despite the challenging operating environment in Europe, GDF Suez's revenues amounted to $129 billion in 2012, an increase of 7% from the previous year due to more favorable weather conditions in France, and growth in the Global Gas & LNG business segment. EBITDA amounted to $22.6 billion, an increase of 3% from 2011. Its EBITDA margin was 17.6%, a drop from 18.2% achieved in 2011. Its net income decreased 10.9% to $2.2 billion, negatively impacted by asset impairments primarily on European assets. Its earnings per share [EPS] amounted to $0.90, a decline of 70% from the previous year. Without taking into account impairment losses, EPS would have been relatively stable. During the first six months of 2013, GDF Suez's revenues fell by 1.6% to $66 billion. Its EBITDA declined by 6.6% to $10.1 billion impacted by Energy Europe which saw a decrease on margins.
GDF Suez's dividend history is satisfactory, as the company has paid a stable dividend over the past few years. In 2012, the dividend per share [DPS] was €1.50 ($2.00), the same as for the previous two years. However, the dividend payout ratio has risen over the past few years due to lower earnings. In 2012, the dividend payout ratio was 220% considering reported earnings, or 83% without taking into account impairment losses. Even though this is still is a high level and a more sustainable level should be a dividend payout ratio between 50-70%, the company is committed to maintain this ratio at least in the short to medium-term. Moreover, its major shareholder (the French state) should be pleased with this high payout and the company's management as committed to keep the DPS unchanged until 2015. At GDF Suez's current share price, this provides in excess of an 8% dividend yield, which is clearly attractive and above the majority of its peers.
GDF Suez has a good cash flow generation capacity, achieving during the past year more than $22 billion in cash flow from operating activities. This was more than enough to finance its $13.3 billion spent in capital expenditures [capex]. Furthermore, it expects a reduction in capex going forward, to a range between $9-10 billion during the next few years. This will increase GDF Suez's free cash flow and improve its dividend sustainability over the long-term. Moreover, the company has an asset disposal program ongoing until 2015 that also supports GDF Suez's dividend policy.
Regarding the company's indebtedness, its net debt was $53 billion at the end of the second quarter of 2013, which is a relatively high amount. The company is going through a deleveraging phase targeting a net debt of around €30 billion ($40 billion) in 2014. The company's net-debt-to-EBITDA ratio was 2.63x as of 30 June, 2013, while management has guided to a target below 2.5x for 2013-15. Therefore, the pressure on the balance sheet is high and if the operating environment in Europe doesn't improve over the next couple of years its deleveraging goals may become difficult to achieve. Nevertheless, most likely the company will look at further disposals or capex reductions, rather than cut its dividend to achieve these targets.
GDF Suez currently offers a high-dividend yield above 8% and it should maintain its dividend unchanged at least for the next couple of years. Its dividend is supported by the company's good geographical diversification, assets disposals program, lower capex in the next couple of years, and manageable balance sheet indebtedness. However, it high-dividend yield should also be considered as warning sign of its long-term sustainability, as GDF Suez's is still heavily exposed to mature markets in Europe that continue to show weak operating trends and could continue to hurt GDF Suez's earnings.