ii view: Severn Trent reaffirms positive dividend policy

Trading update from 1 October to 23 January

ii round-up:

Severn Trent (LSE:SVT) today detailed trading that matched City expectations, with the water utility company flagging a continuation of the existing dividend policy to the end of the next regulatory period (AMP8) in 2030. 

The payment to shareholders will continue to be linked to inflation. As such, an expected total payment for the current 2024/25 full year to 31 March of 121.71p, and including an already announced 48.68p interim payment, will be followed by a payment of 126p for the 25/26 full year, based on November 2024 inflation.

Shares in the FTSE 100 company rose 1% in early UK trading having fallen by a similar amount over the last year. Rival United Utilities Group Class A (LSE:UU.) is down around 5% over that time. The FTSE 100 index itself has risen 13%. 

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Severn Trent supplies over eight million people with around two billion litres of clean drinking water every day. Severn also effectively reduced regulatory uncertainty, accepting Ofwat’s rulings for the AMP8 period announced on 19 December. 

During AMP8, which runs to 2030, business focus will include delivering a further 16% cut in leaks, replacing around 1,400km of water mains, and reducing pollution by a further 30%. Investment made over the AMP7 five-year period to March 2025 totals over £6 billion. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the update, flagging Severn Trent as a ‘top pick.’

ii view:

Headquartered in Coventry, Severn Trent employs around 7,000 people. A constituent of the FTSE 100 index, its name comes from the two predecessor River Authorities which managed the catchment of the Severn and the Trent.

For investors, group net debt of £7.66 billion as of 30 September compares to a current stock market value of £7.5 billion. Index-linked group debt has previously seen financing costs rise, pressuring earnings. Periodic negotiations with the industry regulator remain a constant. The weather can impact performance, while the water industry’s general accountability for the environment cannot be overlooked. 

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On the upside, defensive qualities persist given the need for water no matter what state of health the economy might be in. Agreement with the regulator for the AMP8 five-year period reduces outlook uncertainty. Operational improvements and investment in group infrastructure are ongoing, while management has previously summarised Severn’s financial position as ‘resilient’.

In all, and while risks remain, a forecast dividend yield of close to 5% should keep income investors happy. 

Positives: 

• Attractive dividend payment (not guaranteed)
• Defensive qualities 

Negatives:

• Uncontrollable factors such as the weather can hinder performance
• Regulatory constraints

The average rating of stock market analysts:

Hold