ii view: Severn Trent stays on course

Water company Severn Trent issues a short update to report all is well.

First-quarter trading update

ii round-up:

Severn Trent (LSE:SVT) is a regulated water and sewage company operating in England and Wales. Hafren Dyfrdwy, formerly Dee Valley Water, was acquired in early 2017 and integrated into its regulated water business.

Along with water, it also operates a business services division, with interests in green power, property development and water operating services, whose customers include the MOD and the Coal Authority.

In a brief trading update, management confirmed that current expectations for full-year performance are in-line with prior guidance.

For its customers, it expects to deliver at least £25 million in customer Outcome Delivery Incentives this year and promises further improvements in service. 

In relation to its green power energy interests, SVT generated the equivalent of 52% of its own energy needs over the quarter.

On the supply front, its raw water resources are considered to be in a healthy position prior to the summer period. It has overall storage around 10% higher than the same time last year.

ii view:

Severn Trent, like utility companies in general, is viewed as highly defensive. After all, no matter what the state of the economy, people will always need water and power. As such, and given their dependable cashflows from bill paying customers, their dividend paying abilities have become highly prized, particularly in this era of ultra-low interest rates. 

For investors, a forecast yield of around 5%, not guaranteed, remains attractive. However, there are risks. The regulator's new Asset Management Plan (AMP) is on the horizon. With utility companies generally in the political firing line for poor service and value for money, the bar could be raised. Furthermore, concerns for nationalisation at an unknown price under a future Jeremy Corbyn-led Labour government also warrant consideration. 

Positives: 

• Full-year trading is in-line with management expectations
• Forecast dividend yield of around 5%
• Severn boasts of maintaining the lowest bills in England for 10 years

Negatives:

• Forecast dividend cover of 1.3 times, down from a three-year average of 1.5
• Borrowing, or gearing, higher than rivals
• Uncontrollable factors, such as the weather can hinder performance
• Ongoing threat of nationalisation under a Labour government

The average rating of stock market analysts:

Hold