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If the world is to reach climate goals, vast swaths of the industrial landscape will need to transform. Yet, for listed companies, metamorphoses are hard to pull off. Capital has to be poured into new businesses with uncertain returns. Sceptical investors mark the stock down. Activists pop up on the shareholder register. Calls to divert capital expenditure into buybacks are an obvious corollary.
RWE is a perfect case study of the conundrum many industrial companies will face — if they haven’t already. The underperforming German utility, in which activist investor Elliott has reportedly taken a stake, says it will trim its plans to invest in renewables and buy back €1.5bn of shares. Its stock jumped by 7.5 per cent.
RWE’s investors were concerned that its reinvention from coal-stained utility to renewables operator came with too high a price tag. The group — which invested €20bn in green energy between 2021 and 2023 — was targeting a further €55bn by the end of 2030. That’s more than twice its current market capitalisation.
While it reckons such investments would generate an annualised return of 8 per cent on average, investors had their doubts. For evidence, look no further than RWE’s valuation. Its stock has severely underperformed the sector and trades at a measly 6.4 times next year’s ebitda, based on estimates from S&P Capital IQ. Shares in rival Iberdrola carry a 40 per cent premium.
Or, to look at it another way, RWE’s market value has fallen to around 0.7 times the book value of its assets, which makes buying back stock increasingly attractive. Indeed, it might yield a return somewhere in the mid-teens, reckons Alberto Gandolfi at Goldman Sachs.
It is not hard to see why RWE swerved. Just as buybacks have become more enticing, the renewables landscape feels bleaker — or at least certain pockets of it do. RWE, in clipping its green investment plans, has highlighted a slowdown in European hydrogen and the US offshore wind sector.
There may be a useful lesson here for other companies facing similar stand-offs. RWE has adjusted its sails rather than changed tack. Its buyback, at around 6 per cent of current market capitalisation, is not huge. But it should be enough to reassure investors that the company will not throw money at its strategic vision at the expense of shareholder returns. Given its deep undervaluation, that should bring fair wind for its stock.