Ignacio Galán is being cautious. The experienced executive chairman of the biggest utility in Europe, Iberdrola, has allocated 36 billion euros in net investments by 2026 in the company's updated three-year strategic plan. The majority of the funds will be used to extend and upgrade aging electricity networks, with roughly one-third going to the US. Compared to renewable projects, which are the main source of the $79 billion company's stock market assets, both are thought to be safer investment choices.
Iberdrola's market value has tripled in the past ten years. That's mostly because of an early push toward solar and wind energy installations. Investor enthusiasm for green power investments has waned, despite the fact that Iberdrola has fared better than peers in surviving the Covid-19 outbreak and Europe's 2022 energy crisis. Many projects are now less profitable due to higher financing rates, particularly in offshore wind. After several setbacks, the stock of Denmark's Orsted has dropped by almost 70% from its peak in January 2021.
Still, Iberdrola's stock is currently trading at a similar level as it was at that moment. Galán's new investment goals could solidify the group's appeal, especially because part of that is down to an already-existing mix of regulated assets and US exposure. To electricity grids, he is dedicating 21.5 billion euros, or 60% of net capital spending. In a prior proposal, it was 16 billion euros, or 44%. As more electricity is needed to replace fossil fuels, these networks require major upgrades and changes. Grids, however, also provide investors with more predictable profits because they are regulated enterprises that guarantee a rate throughout the asset's lifetime.
The US is Iberdrola's other main area of concentration. Admittedly, regulatory resistance forced the Spanish corporation to bail out of its $8 billion acquisition of US PNM Resources in January. However, its bid of $2.5 billion to acquire Avangrid, the 18% of the $14 billion US company that it does not now own, demonstrates a consistent dedication to that market. The investment is worthwhile because of the substantial subsidies that President Joe Biden's government is providing for infrastructure and renewable energy. According to the International Energy Agency, US subsidies are higher than those of other nations, and the US has set aside $50 billion specifically for electrical networks. Furthermore, the United States may require investments in transmission lines worth up to $500 billion and distribution networks worth $1 trillion by 2035, based on a report from IMPAX Asset Management.
Investors seem confident that Galán will be able to achieve the upper end of his targeted range of 16.5 billion to 17 billion euros for EBITDA in 2026. Assuming a 2026 EBITDA multiple of 7, which is about in line with the average of competitors such as Enel and EDP calculated by Morgan Stanley, Iberdrola's market value, including debt, should be approximately 120 billion euros.
There are also risks associated with Galán's strategy. Construction costs are rising as a result of Biden's handouts, and Donald Trump, a potential presidential candidate, has threatened to eliminate some green tax incentives. Still, the Iberdrola leader's wagers seem reassuringly logical given that American power networks must grow by two-thirds to accommodate the country's soaring electrical demand.