How Safe Is Veolia Environnement Stock?

By Markets Fool.com

The name Veolia Environnement SA (ADR) (NASDAQOTH: VEOEY) may ring a bell for you. It's a global water, energy, and waste company. However, it might not, because it's French and trades on the over-the-counter market. But don't let that put you off. It's a $13 billion-market-cap company, pays a dividend, and has a worldwide footprint. And it's made some changes over the past couple of years that have reduced its risk profile. Here are three things you need to know to understand how safe Veolia Environnment stock is.

Continue Reading Below

1. Diversified a bit
Veolia's largest line of business (45% of revenues) is providing water and water services to municipal and industrial customers. It also handles waste disposal (35%), from collection to recycling to landfills. And it manages power facilities (20%), too, from traditional plants using coal and gas all the way to geothermal and other renewables. That's a broad set of skills that can be deployed the world over.

But in 2011, 45% of Veolia's business was tied to France. That's really a lot of concentration in one relatively small market. The company realized that it needed to make a change, and today France accounts for just 22% of revenues. That's still a notable number, but much more palatable than 45%.

The rest of Europe makes up around 35% of revenues (it was 24% in 2011), and non-European and global businesses account for the remainder (about 34% in 2011). So Europe overall will still be a big determinant of success or failure, but there's a lot more variety today than there was a few years ago.

One interesting thing in this diversification move, however, is that Veolia slimmed down along the way. At one point it had operations in 77 countries. Today it's more focused, serving just 45 nations. On one hand that's less diversification, and on the other hand, Veolia has culled out weaker businesses and highlighted the better opportunities. So in this case, less is really more.

Image Source: Veolia.

Continue Reading Below

As for the actual lines of business, water makes up around 45% of revenues, waste 35%, and energy 20%. So it has a solid core of "must have" businesses and services, with increasingly vital water providing the foundation. If you're looking for a pure play, this isn't it. But if you like the idea of a company spreading its bets across various indispensable industries throughout the world, then Veolia should be on your short list.

2. Debt reduction
As Veolia has remade its portfolio, the company has been selling assets. It has disposed of some $7 billion or so of assets since 2011 and, importantly, used the proceeds to help pay down debt -- in a big way. Between 2011 and 2015, Veolia reduced its debt by about 40%. Its debt-to-EBITDA ratio went from 4.7 to 3.

Now, Veolia is in a pretty capital-intensive businesses. So debt is to be expected. In fact, long-term debt is about 50% of the capital structure. But that's not unreasonable. For example, U.S.-based water competitor American Water Works' (NYSE: AWK) debt makes up just a touch more than half of its capital structure. U.S. utility giant Southern Company's (NYSE: SO) debt load is also around 50% of its capital structure. And debt makes up about 60% of the capital structure at trash giant Waste Management (NYSE: WM).

But here's the thing. At the start of 2011, Veolia's debt was around 70% of the capital structure. So not only is debt more reasonable relative to its peers today, but the company has also made great strides on an absolute level. And that reduces risk materially for shareholders.

Veolia paying down the debt. Image source: Veolia.

3. Water is key to life, and some other stuff
So, clearly, Veolia has done some serious heavy lifting over the past few years to improve diversification, focus on its best opportunities, and reduce the overhang of leverage. Based on this information alone, the company is much less risky today than it was. In fact, it's probably a good alternative if you don't want to be tied to just North America.

But that brings up a big-picture reason to like Veolia's business: Its foundation is tied to water. After breathable air, water is pretty much the most important thing going for sustaining human life. And, believe it or not, there's not a lot of potable water in the world. Only 3% or so of the world's water is safe for drinking, and half of that is frozen in the polar caps. With an expanding global population, water is going to be increasingly important.

And so is properly dealing with waste, which is often tightly related to water. In fact, even energy is a water issue, because creating electricity often consumes huge sums of water. The point is that Veolia has positioned itself in such a way that its expertise in water can be used to broaden its business in multiple ways. Water, quite literally, is the foundation on which the company is building its growth. Over the long haul, this is likely to be an increasingly important point of differentiation.

So how risky is Veolia? The answer is twofold. First, it looks a lot less risky than it was just a few years ago. And if you step back and look at the company's focus around water, it has a solid foundation on which to build for the future. If you're interested in a global utility company that knows how to deal with water, Veolia is a good stock to be looking at -- even if its ticker looks kind of funny.

The article How Safe Is Veolia Environnement Stock? originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Waste Management. The Motley Fool recommends Southern Company and Veolia Environnement (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.