Enel downgraded, E.ON lifted at Morgan Stanley in sector reshuffle

Investing.com -- Morgan Stanley has shifted its stance on several major European utilities, downgrading Italy’s Enel while lifting its view on Germany’s E.ON as part of a broad sector review.

The bank cut Enel to Underweight from Equal-weight, saying the group’s outlook offers “a solid equity story of low growth and high distribution via dividends and buybacks,” but one that now looks less compelling relative to peers.

Analysts led by Robert Pulleyn argue Enel’s strategy “is more comparable to last decade’s utility stories than the current quality growth backdrop,” and expect weak earnings momentum to keep the stock trading at a discount.

The shares have already re-rated in 2025 toward sector averages, reducing the scope for further upside.

Analysts also notes that next strategic steps remain unclear, with buybacks described as small compared with the size of the company and large-scale M&A ruled out.

By contrast, E.ON was upgraded to Overweight from Equal-weight. Morgan Stanley sees an attractive setup following a recent pullback and says expectations have become more conservative around German regulatory returns.

Shares in Europe’s largest energy network operator rose 2.8% by 12:00 GMT. 

Analysts forecast 6.4% annual earnings growth from 2025 to 2030 and point to an average dividend yield of 4%, which together deliver more than 10% total shareholder return.

Despite this, E.ON still trades at a discount to peers on 2025 and 2027 earnings multiples.

“We also continue to see positive optionality in final German regulatory outcome which could unlock use of €5-10bn of balance sheet headroom into higher capex, which would drive EPS upgrades,” the team added.

“Alternatively, E.ON could increase its dividend payout ratio from 50% to 70% and improve dividend yield.”

Beyond these two names, Morgan Stanley’s reshuffle also included an upgrade of Veolia to Overweight, along with upgrades for Drax and Solaria, while Italgas was lowered to Equal-weight.

Price targets were revised for several other names, including Endesa, Iberdrola, Orsted and RWE.

The bank also removed SSE as a top pick and added Severn Trent and RWE to its preferred list.