Fed deals new cards, specifically stays with higher rates

The highlight of last week was the US Federal Reserve meeting. Its representatives voted unanimously in the evening to keep rates in the range of 5.25 % to 5.50 %. This leaves overseas rates at their highest since 2001. But everyone was anxiously waiting to see what the outlook would be for the coming months. US central bankers are already expecting only three rate cuts for the rest of this year, compared to four in the December forecast. At the same time, we can note that the Fed's post-meeting statement was almost identical to its January statement. In doing so, we must highlight the passage about rate cuts not being appropriate until officials have more confidence that inflation is moving sustainably toward the 2% target. Finally, the Fed also reiterated its intention to continue reducing its balance sheet by up to $95 billion per month.

As a result, this Fed meeting supported the stock markets but went against the dollar. In any case, the Fed dealt a new hand. Specifically, it is sticking with higher rates and wants to make sure that higher inflation does not return. This is also why the Fed does not want to rush to cut interest rates. For this reason, the weakening of the dollar should not be long in coming. This has already been confirmed. While yesterday the dollar weakened to the level of USD/EUR 1.094, today the dollar is slightly strengthening back towards the level of USD/EUR 1.090. The exchange rate of the koruna remains calm after yesterday's 50 basis point rate cut by the Czech National Bank - specifically at the level of CZK 25.20/EUR.

Czech investors were again interested in the news that the results for last year were published by the most famous title of the Prague Stock Exchange - the energy giant CEZ. Let's start at the level of operating income. CEZ's operating income rose by 18 % year-on-year to CZK 340.6 billion. The first reason for the decline was that both corporate customers and households reduced their consumption due to higher prices. The second reason was weather conditions. And thirdly, the fact that we are increasingly seeing solar panels on the roofs of Czech houses contributes to the decline in electricity consumption by CEZ. CEZ's net profit for 2023 stood at CZK 29.6 billion. This meant a drop of 63 %. The drop in net profit in 2023 is excused by the fact that 2022 was the year of the energy crisis and was unrepeatable. Moreover, we must remember that for 2023 CEZ had to cope with new taxes. The cost of levies on excess production revenues reached CZK 10 billion, and the tax on windfall profits reached CZK 30 billion. In spite of these extraordinary taxes, CEZ achieved the second highest profit in the last 10 years in 2023 (only the aforementioned year 2022 was better). Net profit adjusted for extraordinary effects reached CZK 34.8 billion in 2023. This result could give us a clue towards the dividend, which is of interest to every stock investor every year. Last year's dividend should be in the range of CZK 39 to CZK 52 per share, according to CEZ's current dividend policy (i.e. 60% to 80% payout ratio). This would imply a dividend yield in the range of 4.5 - 6.1 %. However, the Czech state, as the majority shareholder of CEZ, may seek a higher dividend. In this way, it could try to plug some of the holes in the state budget. If the state, like a year ago, proposed to dissolve the entire net profit of the previous year in dividends, then the dividend would amount to CZK 65 (7.5% dividend yield).

And what does all this mean for CEZ's share price? It is down 3.5 % to 859 crowns today. But we must not forget that during the spring of last year, the Czech state, as the majority shareholder of CEZ, began to pave the way for full control of CEZ by changing the rules of the game. This has undermined confidence in CEZ shares to this day. Simply, investors can no longer rely on CEZ shares to remain on the Prague Stock Exchange as a stable dividend title for years to come. On the other hand, last year the state tried a recipe for extracting billions of crowns from ČEZ through a higher dividend - without having to squeeze out minority shareholders or split ČEZ into two companies. Theoretically, it could repeat this in the coming years. This would be positive for CEZ shares, at least in the short term. But the main fundamentals go against CEZ. Stock exchange electricity prices are in a downward trend. Well, this is something that will prevent a pullback in CEZ share prices. We do not expect CEZ share prices to return above the CZK 1,000 level in the near future. Our target for CEZ stock is at CZK 800.

Markéta Šichtařová
nextfinance.cz
Next Finance s.r.o.