Utilities aren't just about electricity and gas. After all, we expect clean water to come out of the faucets. We expect all waste water to go away. And we really don't want our garbage sticking around any longer than necessary. So Americans may want to learn more about Veolia Environnement (NYSE:VE) -- a French company with a worldwide footprint in a variety of utility businesses.
First-half results were sound, if just a bit disappointing vis-a-vis analyst estimates. Revenue was up 10% and recurring operating profit climbed 16%. While as-reported net income dropped 9%, it climbed 26% on a recurring basis. Looking ahead, management reiterated guidance for revenue growth of 8% or better and double-digit operating-profit growth.
In a rather odd arrangement, Veolia's operating segments fell neatly into line -- the biggest business had the most growth, and the rest fell into line according to both size and profit growth. The water business (which provides nearly half of operating profits) saw operating profit grow 17%, while waste management, energy services, and transportation grew by about 12%, 11%, and a little less than 6%, respectively.
Veolia management isn't being stingy with its cash flow. In addition to spending roughly 40% of its capital expenditures budget on growth projects, management is targeting a dividend payout ratio of 50% to 60% of net income and intends to raise the dividend by at least 10% this year. Veolia should be able to keep that dividend level steady for the near future, as the company is in the early stages of reaping positive free cash flow (FCF) from past investments.
While Veolia and Suez (NYSE:SZE) are similar in some respects, they are also quite different. Veolia is much more dependent upon water than Suez and Veolia is not a player in electricity, while Suez is. And although both companies have pretty considerable debt loads, Veolia has much more debt relative to equity and pays a somewhat lower dividend.
Where Veolia may stand out, though, is in the aforementioned free cash flow leverage. Because Suez has a lot of capital investing still ahead, Veolia should see better cash-flow performance over the next few years, which could mean accelerated debt paydown and/or higher dividends.
Veolia seems rather expensive to me today, but I won't argue with the notion that its businesses are attractive and in demand. E.ON (NYSE:EON) is still more my cup of tea amongst European utilities, but both Suez and Veolia have their charms.
More utilitarian takes:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
