European utilities are slowly on the mend following the disastrous 2010-11 that led several to slash dividends and divest large portions of their businesses. Earnings rebounded in 2012, cash flow has improved and the dividends are well-covered albeit at a much lower level than their pre-crisis payouts. But with power and gas prices still stuck at cyclical lows and the sluggish economy still weighing on energy demand, we don't see much material earnings growth for utilities in continental Europe.
Utilities such as E.ON, RWE, EDF and GDF Suez offer compelling value opportunities
That said, many European utilities sported dividend yields above 6% as of early 2013 and long-term growth prospects outside of Europe appear robust enough that utilities such as 
E.ON (EOAN), RWE (RWE), EDF (EDF) and GDF Suez (GSZ) offer compelling value opportunities.
Still, European politicians and regulators continue to see utilities as an easy target, and we'll be watching tax and customer rate policies (notably in France and the UK) during 2013 that could have a material and lasting effect on earnings for several utilities, including EDF and National Grid (NG.).
To spur growth, many European utilities have turned away from mainland Europe, selling domestic assets and investing primarily in emerging markets. E.ON has targeted Russia, Brazil, and Turkey for growth investments in 2013-2014 while finishing its €15 billion divestment plan of operations primarily in developed markets. Similarly, E.ON's German peer RWE is shedding €7 billion of mostly Central European assets while investing in Eastern Europe. Enel (ENEL) is offsetting its woes in Spain and Italy with investments in its Latin American utilities and GDF Suez's 2012 acquisition of International Power gives it a foothold for investment in the Middle East and Asia.This year we'll begin to see if earnings and returns from those investments indicate management made smart strategic decisions.
This report was generated by Morningstar Equity Research Services.
