Bloomberg News

GDF Suez Cutting Record Dividend Seen in Options Market: Energy

February 13, 2013

GDF Suez SA Chief Executive Officer Gerard Mestrallet says the French utility’s dividend is a sacred cow -- even at a world-leading 10.2 percent yield. Options traders don’t believe him.

While Mestrallet has promised to maintain the 1.50 euro ($2.02) annual per-share payment, and all 24 analysts surveyed by Bloomberg accept his pledge, investors are betting on a 16 percent cut to 1.26 euros, according to dividends implied by options trading. GDF Suez’s current yield is more than twice the 4.6 percent average of the 82-member MSCI World Utilities index.

“They may have to cut it a bit,” Heino Hammann, an analyst at Norddeutsche Landesbank Girozentrale in Hannover, said by phone. The dividend “may be difficult to keep” at this level for 2013 and beyond, said Hammann, who has a hold rating on the stock and estimated a 1.50 euro dividend on Nov. 1.

Mestrallet is promising the 3.6 billion-euro annual payment even after wholesale power prices and natural gas demand slid in Europe and two of the company’s nuclear power plants were shut in Belgium. His effort to make GDF Suez attractive to investors is helped by corporate bond yields falling, which contributed to the $1.6 trillion gain in global stocks since Dec. 31.

GDF Suez is among companies around the world rewarding shareholders with the highest dividends in more than two decades compared with bond interest payments, even after the best start to a year for equities since 1994. The 1,610 stocks in the MSCI World Index paid an average 2.7 percent of their share price in dividends as of last week, according to data compiled by Bloomberg.

Highest Yields

GDF Suez is the world’s highest-yielding utility, ahead of EON SE of Germany and France’s EDF SA with yields of 8.3 percent and 8.1 percent, respectively, according to data compiled by Bloomberg as of Feb. 8. Shares in GDF Suez fell 11 euro cents, or 0.7 percent, to 14.87 euros at 5:29 p.m. in Paris.

The June 19 put, or a contract to sell the shares at 19 euros each in that month, fell 1.1 percent to 4.58 euros, according to data compiled by Bloomberg.

Exelon Corp., owner of the biggest group of U.S. nuclear power plants, said last week it would cut its dividend for the first time to maintain an investment-grade credit rating as wholesale power prices decline.

For GDF Suez, “the board has confirmed its dividend policy which is very clear, that every year a dividend equal or higher than the previous one” will be paid, Mestrallet told analysts Dec. 6. The 1.50-euro payout from 2012 earnings was decided by the board even before the financial year was closed, he said.

February Announcement

Mestrallet, who was peppered with questions about the dividend at the company’s investor day, gave his assurances as the shares dropped 16 percent on lowered forecasts for earnings this year and predicted weakness in 2014. The stock has since touched its lowest level since the merger between Gaz de France SA and Suez SA which created the utility in 2008.

An announcement on the next semiannual payment will be made Feb. 28, according to Bloomberg forecasts. Jerome Chambin, a spokesman for GDF Suez, declined to comment. GDF Suez shares have dropped 4.6 percent this year.

The company’s yield would drop to about 8.1 percent if it reduces the payments made during calendar year 2013 to 1.20 euros, as implied by options. Dividends can be estimated, or implied, by comparing the relative prices of put and call options to forwards, a financial instrument an investor sells for future delivery. A 1.20 euro dividend is about the level earned by its stockholders a year ago.

Dividend ‘Priority’

GDF Suez, the second-largest utility by market value, has more than enough room to maneuver, with “priority” given to the dividend over capital expenditures if a choice had to be made, Mestrallet said.

“We have a strong free cash flow to finance the dividend and we have also the flexibility to adjust if it would be necessary,” he said. “Is not in our mind, but we have the capacity to adjust the capex in order to maintain the dividend,” as was done in 2012.

The utility is planning to reduce capital expenditures by 20 percent in 2013 and 2014 to 7 billion euros to 8 billion euros annually, according to a company statement in December, which also said the board had a “commitment to the group’s dividend policy.”

Free cash flow probably increased last year to 4.1 billion euros from 2.96 billion euros in 2011, according to the average of nine analysts’ estimates compiled by Bloomberg.

Cash flow generation will be stable in 2013 and 2014 even though there is a negative macroeconomic situation and a “negative situation” for power and energy prices in Europe, Chief Financial Officer Isabelle Kocher said in December.

The utility has said 2013 and 2014 will be “two difficult years in Europe” and it plans to lower debt by a third by the end of 2014. It forecast a “rebound” in 2015 financial performance, although it didn’t give figures in December.

GDF Suez has made its position “very clear” that it plans to keep the dividend at 1.50 euros a year, said Martin Young, an analyst at Nomura in London.

To contact the reporters on this story: Todd White in Madrid at twhite2@bloomberg.net; Tara Patel in Paris at tpatel2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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