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Investors bet European utilities will fall as outlook sours

* Short interest in European utilities rises

* Earnings, dividend outlook deteriorates

* Dividend seen falling 15 percent in 12 months

By Atul Prakash

LONDON, March 12 (Reuters) - Short interest in shares of European utilities has risen in past weeks, as investors become bearish on the stocks because of poor earnings outlooks and pressure on their dividend payouts.

Utilities stocks usually attract investors seeking bond-like returns and high dividend payouts. But expectations rates will rise in the United States and the United Kingdom have boosted bond yields, making utilities less attractive after a recent share rally.

Rates in the euro zone are on the opposite path, but the earnings outlook for utilities in the region is poor because of over-supply and lower pricing power. In addition, a weaker euro does not boost their earnings, since their focus is largely domestic, analysts said.

Analysts expect earnings per share (EPS) for companies in the STOXX Europe 600 Utilities index to fall 0.7 percent in 2015 from a year ago, against predictions at the start of the year for growth of 3.4 percent, according to Datastream. http://bit.ly/1FelIFC

According to some industry estimates, companies like GDF Suez, Iberdrola and Enagas allocate 74 to 97 percent of their earnings to dividend payments. Any hit on their earnings could result in a cut in their dividends.

"The big question is: can they maintain high dividends? Earnings are tight and dividend cover (portion of earnings earmarked for dividends) is high. European utilities will need to maintain earnings to continue paying high dividends, which is not easy," James Butterfill, global strategist at Coutts, said.

The sector now offers a dividend yield of 6.5 percent, among the best in Europe. However, dividends per share of utilities are expected to fall 15 percent in 12 months, against forecasts in October of growth of 2.3 percent. http://bit.ly/1C9RLHA

The bearishness is prompting investors to borrow more utility shares to sell, betting that they can buy them back at a lower price before returning the stocks to the lender.

According to Markit, Iberdrola saw the percentage of its shares available for borrowing up 4.0 percent from 1.4 percent a month ago. Short interest in other utilities like Centrica , E.ON and GDF Suez has also risen in the past weeks.

"Tighter regulations across Europe, limits on price hikes, and low electricity prices due to oversupply and poor demand are hurting profit margins of utility companies and darkening their earnings outlook," Ronny Claeys, senior strategist at KBC Asset Management, in Brussels, said.

"In Europe, we prefer those sectors which profit from an increase in consumers' spending power, and utilities are not among them. The only attraction is their high dividend yields, but utilities are not the only one paying high dividends."

The European utilities index has fallen 3.7 percent since early February, underperforming the broader stock market, after gaining 13 percent in two weeks from mid-January.

(Reporting by Atul Prakash; Editing by Lionel Laurent, Larry King)

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