Is E.On Energy A Hidden Gem?

| About: E.ON SE (EONGY)
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E.On Energy (OTCPK:EONGY) is an equity most people have never heard of. E.On, what the heck is an E.On? Sounds like a space ship or something. Not quite. E.On energy is one of the world's largest companies, and despite being the 116th largest company in the world, according to the most recent Financial Times Global 500, you likely have never heard of them.

Seeking Alpha isn't helping. They have no information for E.On beyond the historical stock price chart. According to The Motley Fool, E.On's current market cap is $38.8 billion with a P/E of 5.91. E.On's annual report, which came out in March, is on the whole encouraging. For 2011, E.On was unprofitable, posting a close to 1.5 billion Euro loss. At first, this sounds terrible and a lot of investors appear scared off by this. However, sometimes it pays to go against the herd, and I see the 2011 drop in earnings as a great opportunity to initiate a long position at a low valuation while most people are dismissing E.On. Digging into the annual report, there are actually a lot of things to like. Electricity sales increased by 11 percent and gas sales by 28 percent. Overall sales increased by 22 percent in 2011. These are signs of a healthy company.

The (as of March 30th now ex-) CEO explains that the reason E.On posted a loss in 2011 was due to the early shut down of E.On's nuclear power stations in Germany and also due to a "loss in our gas wholesale business in the high three-digit million range."

Not coincidentally, Germany is currently undertaking one of the most ambitious energy plans in human history, trying to shift away from nuclear energy to renewables, specifically wind: "The country plans to install 7,600 megawatts (MW) in offshore wind parks by 2020 and over 25,000 MW by 2030."

Will this plan work? Given the work ethic and reputation of Germany, I wouldn't bet against them. Regardless, E.On is set to cash in big time on this shift to wind power. In 2011 E.On posted a loss transitioning away from their nuclear power stations. But in the coming years, E.On is going to be very busy installing wind power generators all over the place in Germany and this should lead to profitability in the years to come.

Something else to entice investors is that E.On has already guaranteed their dividends for both 2012 ($1.46) and 2013 (at least $1.46). With the current share price of $19.38, your pre-tax yield is about 7 percent. Given the low yields of most American companies, this dividend is attractive, especially when you consider that the company has already declared that they will at the least keep the dividend the same and will try to increase it in 2013.

There are a lot of things I like about E.On, and very few things that I don't. The current payout ratio is 76 percent of cash flow which seems manageable. Even if things don't work out with the planned grand switch to wind in Germany (I would not bet against Germany succeeding, but it's a possibility), E.On is well diversified with operations across Europe, North America and in Russia. E.On is a beaten down, neglected European blue-chip that has the potential to reward shareholders who decide to give E.On some loving. I am very bullish on this stock and anyone who is looking to diversify outside of American equities would be smart to consider investing in E.On.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.