Berko: French utility
Monday, March 04, 2013 4:46 PM
Dear Mr. Berko:
Like most of us, I am looking for higher yields on my certificates of deposit. I have a $7,000 certificate of deposit which paid 4.5 percent that recently came due, and a neighbor, whose husband works in France for an American drug company, told me that they recently bought 300 shares of a French utility called GDF Suez because it yields 9.2 percent. What do you think of this recommendation?
– R.W., Vancouver, Wash.
Sometimes, backyard gossip can yield better information than the daily newspaper or the evening TV news. And it’s a lot more fun, too.
GDF Suez SA (GDFZY-$20.17) is a $124 billion-revenue French utility company (water treatment, natural gas storage and transmission, power generation, waste collection, hazardous waste treatment, oil and gas exploration and trading, nuclear power, liquefied natural gas (LNG) terminals, and recycling) that earned $2.05 a share last year, with a handsome $1.93 dividend yielding 9.6 percent.
I remember reading an article about GDFZY in a great magazine, The Economist, way back in 2008. At that time, GDFZY traded at $60 and earned $2.96, and the $2.03 dividend yielded 3.4 percent. That was 40 points ago. GDFZY has been doing its thing in a French way since 1880, and it has been doing those things almost modestly well for a company run by Frenchies. GDFZY trades at a reasonable 10 times earnings, has a sizable $30 billion in cash and trades at $16 under its $36 book value, though it does have $89 billion of debt. But – and this is a big but – GDFZY’s net profit margins of 3.3 percent compare unfavorably with the average 10 percent net profit margins of its American utility company cousins. Another “but” is GDFZY’s 221,000 employees, none of whom can be laid off when revenues or profits begin to decline, as mandated by the socialist government’s policy.
The French economy is in bad shape and certainly worse than ours. I don’t like being chased into buying foreign stocks for yield, especially French equities, because of low U.S. interest rates. And I don’t like owning shares of companies with which I can’t talk to their management in English. I can’t find a research report on this thing, and its annual reports are printed in a funny language called French, which if I could speak it, I wouldn’t.
However, a friend of mine at Merrill Lynch who watches over European stocks believes that GDFZY’s balance sheet is strong. He also believes that its revenues and earnings will be stable for the coming few years and that the dividend should remain at the current rate. He thinks management is focusing on its fast-growing LNG and energy production markets. He believes that GDFZY has promising developments in bio-energy, electricity storage technology, smart energy and nonconventional gas. He thinks GDFZY will turn these developments into profits for its subsidiaries in Norway, Germany, the Netherlands, the United Kingdom, Denmark and the United States. He believes that future European growth will be driven by energy-efficient activities and that GDFZY’s lead in this endeavor could grow revenues by 30 to 40 percent in the coming five years. These efficiencies also should enable GDFZY to reduce its operating costs in many key areas, as well as improve its earnings.
Even though the French economy is struggling, even though the government is stridently socialist and even though French union leaders are overtly anti-business, I can’t find enough compelling reasons to discourage you from owning GDFZY. There are just not enough negatives to pan this stock, and my Merrill friend thinks the stock could trade in the low $30s several years hence. GDFZY’s 1.3 billion shares have been sliding steadily in price since July 2008, when they traded at $63 a share. My Merrill guy believes that GDFZY’s share price touched bottom late last year at $19.30. So go ahead and get yourself 300 shares. The potential gain a few years down the road seems to easily outweigh the risks. And several large American mutual funds, including Fidelity and Vanguard, agree.
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