FRANKFURT Shares in Innogy, comprising the healthier assets of struggling power group RWE, hovered around their issue price in their stock market debut on Friday after Germany's largest listing in 16 years.
Innogy, valued at roughly 20 billion euros (17.96 billion pounds), bundles the networks, renewables and retail business of RWE, Germany's second-largest utility. Power generation and energy trading stay with RWE.
The stock started trading at 37.30 euros, above an issue price of 36 euros, but dipped as low as 35.95 euros in early business. They stood at 36.2 euros at 0910 GMT, while RWE, which still holds three-quarters of Innogy, was down 4.7 percent.
Two-thirds of Innogy's core profit comes from stable power and gas networks, whose returns are set by regulators, providing a degree of clarity over future earnings and an opportunity for infrastructure investors and pension funds.
With a planned payout ratio of 70-80 percent of adjusted net income and an expected dividend yield of 4-5 percent, Innogy also beats placing cash in a bank account due to the European Central Bank's zero interest rate policy.
"We see the market moving towards a dividend valuation approach for Innogy based on the dearth of German infrastructure companies," analysts at Macquarie said in a note, rating the shares as "outperform".
"A 4 percent implied dividend yield for Innogy over 2016-20 would imply a 46 euro/share valuation," it added.
Despite its appeal to infrastructure investors, Innogy faces its own set of challenges, including a pending decline in returns in grid fees, rising competition in its renewable business and problems at its British npower unit.
The listing follows years of falling profits at RWE's conventional power generation unit, its core business, which has come under intense pressure from renewables and a steep decline in wholesale prices.
This has led investors to dump German utility stocks and slap major discounts on them. Investors are also concerned at the potential costs of storing radioactive waste after the country's last nuclear power plants go offline in 2022.
(Reporting by Christoph Steitz; Writing by Maria Sheahan; Editing by Harro ten Wolde and Adrian Croft)