I'll bet that most people pay attention to utility companies only when their monthly bills show up. Sure, we all know that utilities are supposed to be great income producers, but how many people really ever canvass the utility world for investment ideas? Utilities seem stodgy, boring... the sort of thing that sagacious financial planners recommend for our grandmothers.
Well, going where other people usually don't is a great way to find investment ideas such as German utility company E.ON
One of the largest utility companies in the world, E.ON supplies power and gas throughout Europe. Strong not just in its home country of Germany, E.ON has established a presence for itself in Central Europe and beyond since the fall of the Berlin Wall. With ventures in the United States, Great Britain, and Sweden as well, E.ON truly is a global power in power.
Results for 2004 were pretty solid. Sales climbed 6%, while EBIT (earnings before interest and taxes) climbed 18%. Although net income declined year over year because of the benefit of some one-time sales in 2003, income from continuing operations rose about 10% for the year.
Better still, the company produced 14% more cash flow in 2004 than in 2003 and decided to raise the dividend by 17.5%. Though the company already has a respectable yield (about 2.6%), management has stated that it intends to increase its payout ratio from 36% in 2004 to somewhere between 50% and 60% within a few years.
On a slightly less positive note, the company will be spending considerable sums of money over the next couple of years to support and add capacity around the world. In addition to plans to spend up to 5.2 billion euro (about $6.7 billion) in Germany to add 2,000 megawatts of generation capacity, the company will be spending about 20% more than that to add capacity in Central Europe as well.
The upgrades will no doubt crimp free cash flow, but the company has a very manageable debt load and sports a double-digit return on capital (11.3%) that exceeds its cost of capital (9%) by a healthy margin. That sort of spread is exactly what makes companies (and their investors) successful in the long run.
Nobody should confuse E.ON for a growth stock, but investors looking for a solid, reasonably priced income producer might do well to delve a bit deeper into E.ON and see whether any light bulbs go off for them.
Want to find other income-producing companies?
Motley Fool Income Investor
has already identified some promising prospects, including Southern Company
Fool contributor Stephen Simpson has no ownership interest in any stocks mentioned.
