Morningstar - Q3 2020 - 23

spotlight with last year's Woodford Equity
Income collapse, when many questioned whether
the fund would have been able to get into
such a situation had the manager still had the
oversight of his previous firm, Invesco IVZ.

Within the Bad group, we expect SSE SSE:GB
and National Grid NG.:GB to rebase their dividend
to protect their credit ratings, while United
Utilities UU.:GB should be able to continue to
increase them, although at a slower pace
than before.

Holly Black is a senior editor with Morningstar UK.

Sweet Spots Among
European Utilities

Among the Ugly ones, our preferred picks
are Veolia VIE:FR and Engie ENGI:FR. We expect
them to reinstate their dividends at precut levels
as of 2020.
Tancrede Fulop is a Morningstar equity analyst based in
Amsterdam.

GREATER EUROPE

European Union

When the coronavirus became a pandemic in
March, a wave of dividend cuts-chiefly
among French utilities-followed. That caught
investors off guard. European utilities'
financial health had widely improved in recent
years, as companies had been avoiding
mistakes of the past, such as big, value-destructive
mergers and acquisitions.
There are still sweet spots for dividend seekers.
We distinguish three groups among the
utilities we cover. The "Good" group is composed
of companies that reaffirmed their dividend
plans. The question mark for investors here is the
sustainability of their dividends. The "Bad"
group consists of those companies that issued
cautious comments on dividends. Their
question mark is the likelihood of cuts and their
extent. The "Ugly" category contains the five
companies that cut or canceled their dividends;
when and to what extent their dividends
will be reinstated are unknown.
Except for Naturgy NTGY:ES, we see limited risks
of dividend cuts in the Good group because
of strong free cash flow and high earnings
growth. These appealing features are priced in
because the average price/fair value is 1.07.
However, they exhibit an appealing 4.8% dividend
yield, well above the 3.9% sector average and
European government bond yields. Our preferred
dividend plays are Enel ENEL:IT, Endesa ELE:ES,
Red Electrica REE:ES, and RWE RWE:DE.

Does Betting on
Duration Pay?
AUSTRALIA + NEW ZEALAND

Australia
Positioning interest-rate duration to capitalize
on expected market movements is a core tenet of
active bond management. We investigated the
degree to which managers have been setting
their interest-rate risk both in relative and absolute
terms, we looked for any discernible trends,
and we gauged whether higher-conviction bets
have paid off.

The Good, the Bad, and the Ugly Dividend investors still have options among
European utilities.
2019
Dividend
Yield (%)*

Price /
Fair Value

Centrica CAN:GB

0.0

0.64

Engie ENGI:FR

0.0

0.79

Veolia VIE:FR

2.4

0.85

EDF EDF:FR

0.0

0.88

Suez SEV:FR

4.3

1.04

Average

1.4

0.84

SSE SSE:GB

6.5

1.08

National Grid NG.:GB

5.3

1.24

United Utilities UU.:GB

4.5

1.30

Average

5.4

1.21

Naturgy Energy NTGY:ES

8.3

0.77

RWE RWE:DE

2.7

0.90

Red Electrica REE:ES

6.4

0.98

Endesa ELE:ES

6.9

0.99

Enel ENEL:IT

4.5

1.11

E.ON EOAN:DE

4.7

1.16

Orsted ORSTED:DK

1.3

1.20

Iberdrola IBE:ES

4.1

1.24

EDP EDP:PT

4.6

1.29

Average

4.8

1.07

Company

Ugly

Bad

Good

Dividend
Canceled

Dividend
Cut

Cautious
Comments

Dividend
Reaffirmed

*Based on the dividend rate approved in 2019 to be paid in 2020.
Source: Morningstar. Data as of 06/30/2020.

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