RWE: Strom und Drang Premium
Clarity on dividends and decommissioning is welcome but a convincing plan is needed
Germany’s pre-Romantic literary movement was characterised by emotional extremes described as Sturm und Drang. RWE shareholders know all about those. In 2016, the German utility wiped €3bn off the carrying value of its power stations and axed its dividend. It also carved out Innogy, stabilised its balance sheet, reached a deal with Berlin on nuclear clean-up costs and won a partial court victory over the shutdown of atomic power.
On Wednesday the company pre-announced headline numbers from its 2016 results, due March 14. They included another impairment charge — €4.3bn this time — against generation assets. Four-fifths of this is applicable to German power stations. It also said that it would not pay a dividend on its ordinary shares in respect of 2016, the second year of no payout. It aims to make a 50-cent distribution in respect of 2017. Analysts had forecast 30 cents for 2016 and 45 for 2017; the last ordinary dividend was €1 in 2014.
This news will disappoint many shareholders, especially the various Ruhr municipalities that hold about 23 per cent of RWE’s stock — though they may be comforted by the suggestion that future payout policy will be progressive. Rating agencies will feel reassured, even though not paying a 30 cent dividend will save a relatively paltry €184m. Keeping them onside is important: RWE derives a quarter of profit from its trading business, which needs an investment-grade rating. Moody’s rates RWE just above junk.
There were other positives. RWE’s overall debt fell by more than expected, partly reflecting the carve-out of Innogy. That transaction has given it sufficient firepower to make its €6.8bn contribution to the nuclear decommissioning fund in one payment, in July 2017. This will reduce political risks, although it will not remove them entirely. About a quarter of RWE’s generating capacity is lignite-fired. The future of these plants, which are heavily polluting, may be revisited after the federal election in the autumn.
Greater clarity on dividends and decommissioning is welcome. But the problem of low power prices remains, leaving RWE looking like a low-growth vehicle for legacy liabilities (adjust for its stake in Innogy, and its equity value is negative) It cannot compete with its offspring in renewables or grids. A convincing strategy is needed if it is to focus on Strom (electrical current in German) and move away from Sturm.