Monday, January 1, 2018

ENDESA, GREAT INVESTMENT?

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Endesa is one of the largest electric utility companies in Spain.

At first sight it looks like an excellent company: relatively large, in a strategic sector, and it is a consistent money earner, offering extremely high dividend yields that at current prices will be above 7% for 2018.

But I think this excellent dividend is not the result of the company being currently undervalued, nor a representation of its good operation.

After Endesa was bought by Enel, who is now its main shareholder with around 70% of the company, Endesa was plundered: good parts overseas sold off to its parent company Enel and this profit offered as an extraordinary dividend for its shareholders, Endesa indebted itself and transformed this cash into more dividend, and of course, almost all net income is transformed into dividends.

This may sound excellent if you are a shareholder, since you receive a considerable rent for your investment, but there are consequences to it: the investment in growth, expansion and development is minimal, resulting in a stagnant company. 

I'm a bit concerned for the sustainability of both the dividend yield and the price of the share in the long run.

It seems I'm not the only one, since the company announced this November that they would maintain this dividend until 2020. Good news for shareholders, assuming it will be true.

Personally, I did invest in Endesa, and I'm very happy with its high dividend yield, but as with all investments, I see the potential for some trouble: 

The spanish government is probably angry at Enel, and in a regulated sector, this isn't good, as a change in regulations could mean a loss in profits.

Highly dependent on business in Catalonia, where there is political trouble, and no international investments.

Highly dependent on coal and gas, and a relatively low investment in renewable energy.
Personally, if I were to buy more Endesa shares now, I would probably ask for at a price of at most 19€.

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Brothers, best of luck in your investments and Merry Christmas!

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