Old coal is king of DAX as investors look beyond writedowns

RWE AG, with some of its legacy coal plants dating back to the 1950s, is this year outperforming new green rivals that are supposed to be the future of the energy industry — as well as every other company on Germany’s main stock index.

With investors brushing aside Wednesday’s news of a scrapped dividend to most shareholders for a second consecutive year and another multi-billion-euro writedown on its conventional power plants, the Essen, Germany-based company gained 12 percent this year. Reasons for the utility’s best start to the year since 2014 can be found in October’s initial public offering of Innogy SE as well as a long-awaited recovery in wholesale electricity prices.

To save itself from an outdated utility model operating in the brave new world where green energy gets most of the favors, RWE shifted its renewables, grid and retail arms into Innogy. The proceeds of 2.64 billion euros ($2.78 billion) was a welcome boost to its balance sheet — until last year savaged by a power-price rout lasting half a decade.

Benchmark power contracts have gained more than 20 percent since September. The market has started to notice the recovery, while it hasn’t been fully priced in yet, Ahmed Farman, an analyst at Jefferies International Ltd., said by phone from London.

By contrast, Innogy and EON SE, which spun off its fossil-fuel business last year, have little exposure to the daily swings of energy markets.

RWE, which dates back to the 19th century, gets a majority of its electricity from hard coal and lignite. Lothar Lambertz, a company spokesman, declined to comment on the performance of its shares this year.

By comparison, Innogy gained 2.6 percent this year, while EON rose 7.5 percent. Enel SpA, Europe’s biggest utility by market value which has bought back its renewable subsidiary, dropped 5.4 percent.

Political Hedge

Some investors may also have preferred RWE over French utilities as German stocks are considered a hedge by JPMorgan Chase & Co. against the political risks in the run-up to the French presidential election.

Fund managers sold off utility shares at the end of last year in the aftermath of the presidential election in the U.S. to instead focus on stocks more closely tied to economic growth. European utilities had their worst month in November since August 2015. RWE was disproportionately impacted and is now seeing a rebound, according to Thomas Deser, a fund manager at Union Investment in Frankfurt that holds RWE shares.

Municipal shareholders that own more than 20 percent of RWE are “deeply disappointed” by the dividend suspension this year, said Ernst Gerlach, a director at Verband der kommunalen RWE-Aktionaere GmbH, which represents them.

They regard the 50 cents per common and preferred share RWE is planning to pay shareholders next year for 2017 as “lower limit,” according to Gerlach.

“Now there’s some prospects for dividend payments again,” Guido Hoymann, an analyst at B. Metzler Seel Sohn & Co. KGaA, said by phone from Frankfurt.

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us