A French Thirst Quencher

05/11/2010 12:31 pm EST

Focus: GLOBAL

Carla Pasternak

Editor, The Income Investor

Water specialist Veolia offers a nice yield from essential services in growing demand around the world, writes Carla Pasternak in High-Yield International.

Paris-based multinational Veolia Environnement (NYSE: VE) is one of the world's largest publicly traded water companies. Although the core business is water services and waste water treatment, Veolia is involved in several other areas, including waste management, heating and cooling services, and public transportation. The company operates in more than 60 countries and generated revenue of EUR 34.6 billion last year.

Like many foreign companies, Veolia pays dividends once a year. Dividends are paid in euros and converted to dollars for American ADS holders. Dividends are paid in June and have been EUR 1.21 per share since 2007. [That translates to $1.52 per share for a trailing yield of 5.4% at Tuesday's New York closing price of $28.19 per ADR—Editor.]

Free cash flow of EUR 1.3 billion in 2009 easily covered dividends of EUR 434 million. Management also said it expects to cover this year's dividend with free cash flow. Since dividends are declared in euros, there is currency risk. Dividends qualify for the 15% reduced tax rate, but are subject to a 25% withholding tax that can be claimed when filing taxes.

Veolia operates in four segments: water (including drinking water distribution networks and wastewater services), environmental services (transfer, treatment, and recycling of waste), energy services (providing heating and cooling to businesses and public authorities), and transportation (buses, trains, and boats in 27 countries).

In 2009, these segments provided a diversified revenue stream, which was fairly equally divided between water (36% of revenues), environmental services (26%), energy services (21%) and transportation (17%). By region, 2009 revenues were generated mostly in France (40%) and Europe outside of France (35%).

Revenue last year dropped 3.4% from 2008 levels primarily because of lower waste activities and energy prices in the recession. However, Veola was able to offset lower revenues with cost cuts and asset divestitures. As a result, net profits attributable to shareholders actually increased 44%.

As one of the world's largest water companies, Veola stands to benefit from increasingly scarce fresh water as populations expand and shift, particularly in emerging markets. The company expects water business in China to expand 20% to 30% per year. 

And the stock is cheap. The shares are down over 10% in the last two weeks as the debt crisis in Europe has turned investors away from the region. However, consensus analysts' estimates are for the company to grow earnings 18% next year. With a current PE of 19x, it currently sports a reasonable one-year PEG (price-to-earnings-to-growth) ratio of 1.06x. 

The current weakness in European stocks presents an opportunity to enter a solid defensive company that should continue to generate predictable earnings and a secure dividend. Longer term, the company has strong growth prospects in emerging markets that bode well for the shares.

Subscribe to High-Yield International here…

Related Articles on GLOBAL