Gelsenwasser (FRA:WWG) - The Dividend Trap Unveiled

In the utilities sector, dividends often signal stability. But for Gelsenwasser AG (FRA:WWG), a closer look reveals a dangerous disconnect between its payout and underlying fundamentals. With revenue plummeting, capital allocation failing, and a dividend payout ratio nearing unsustainable levels, investors face a stark warning: this is a trap. Here's why now is the time to exit—and where to turn instead.

Revenue Collapse: The Foundation Crumbles

Gelsenwasser's revenue has been in free fall. After hitting a high of €14.05 billion in 2022, trailing twelve-month (TTM) revenue plummeted to €3.2 billion by December 2024, a staggering 77% decline (see

). Even recent quarterly data offers little solace: the latest quarter reported €1.69 billion in revenue, up slightly from the prior quarter but still down 27% year-over-year.

The root causes? Aging infrastructure, regulatory headwinds, and the fallout from its 2021 divestiture of energy trading—a move that stripped away high-margin revenue streams. The merger with Wasserservice Westfalen Weser in 2024 has yet to spark meaningful growth, leaving the company reliant on a shrinking core business.

The Dividend: A Precarious Balancing Act

Gelsenwasser's dividend of €21.16 per share (payable in June 2025) is its biggest selling point—and its most dangerous illusion. With net income at just €126.8 million over the past twelve months, the payout ratio soars to 63%, leaving only 37% of profits for reinvestment. This is a critical red flag.

Consider this: if revenue continues its slide and costs rise (as evidenced by falling net income despite higher quarterly sales), the dividend will become impossible to sustain. The writing is on the wall: a cut is inevitable. When it comes, investors will face a double whammy—lower payouts and a plunging stock price.

ROCE: Poor Capital Allocation Exposed

The company's Return on Capital Employed (ROCE) tells a grim story of mismanagement. At 1.9% for the TTM ending December 2024, Gelsenwasser's ROCE is less than half the 7.5% industry average for utilities. This metric has trended downward for years: it stood at 2.9% five years ago and has only worsened despite cost-cutting efforts.

The math is simple: capital employed has risen while revenue and profits collapse. This signals poor reinvestment decisions and a failure to leverage assets efficiently. Even the modest ROCE improvement from 1.9% in 2023 to 2.7% in 2024 is a pyrrhic victory—still far below what's needed to justify the dividend.

The Stock: A Mirror of Decline

Investors have already voted with their wallets. Gelsenwasser's stock price has fallen 63% over three years, with total shareholder returns dropping to -60%. This devaluation isn't just about poor performance—it's a loss of faith in management's ability to navigate the crisis.

The dividend's sustainability is now the single greatest risk. A cut would trigger a self-fulfilling prophecy: reduced income for shareholders, capital flight, and a further drop in valuation.

The Verdict: Exit Strategically

The evidence is clear: Gelsenwasser is a dividend trap. Its payout ratio, declining revenue, and dismal ROCE paint a picture of a company clinging to its past glory while its fundamentals crumble.

Action Items for Investors:
1. Sell WWG immediately: Avoid being left holding the bag when the dividend cut hits.
2. Reallocate to healthier utilities: Consider peers like E.ON (ETR:EOAN) or Suez (EPA:SZE), which boast stronger ROCE, stable revenue, and sustainable dividends.
3. Monitor for red flags: A dividend cut, further revenue declines, or increased leverage could accelerate the stock's downward spiral.

Conclusion

Gelsenwasser's allure as a dividend stalwart is fading fast. With its financial foundation eroding, poor capital allocation, and an unsustainable payout ratio, the risks far outweigh any remaining rewards. Investors would be wise to heed this warning and pivot to utilities firms with healthier fundamentals. The era of easy dividends at WWG is over—and the reckoning is near.