ii view: Severn Trent's dividend remains an attraction

In the environmental spotlight, but with a yield of over 3.5% linked to inflation. Buy, sell or hold?

First-half results to 30 September

• Revenue up 8% to £958 million 
• Adjusted profit up 13.8% to £255.6 million
• Interim dividend up 0.6% to 40.86p per share
• Average net debt flat

Chief executive Liv Garfield said:

“We've continued to invest significantly in our network, in our people and to support our strong commitment to the environment. Our environmental ambitions remain at the heart of our company, whether planting over a million trees, reducing our carbon emissions, or producing an extra 95 million litres of water to tackle the threat of water scarcity.”

ii round-up:

Water company Severn Trent (LSE:SVT) today reported a return to growth in revenue and profit as industrial consumption rebounded following reduced usage during the 2020 pandemic lockdowns. 

In line with policy, it also raised the interim dividend payment by 0.6% to 40.86p per share, along with announcing plans to bring forward river quality targets to within nine years as opposed to an allowed 25-year timeframe. 

Severn Trent shares rose marginally in UK trading, leaving them up by around 40% since pandemic market lows in March 2020. Shares for rival water company United Utilities (LSE:UU.) are up by a similar amount over that time, while the FTSE 100 index has gained around 45%. 

Severn Trent revenue rose by 8% to £958 million, helping adjusted profit to grow by almost 14% to £255.6 million. 

Accelerated river quality targets follow the recent launch of a UK investigation into the discharge of effluent into rivers and seas by the broader water industry.

Operational performance ahead of plan is expected to generate Outcome Delivery Incentives (ODI) of at least £75 million for the full year. ODIs are paid to water companies by the regulator for meeting or exceeding targets, including items such as reducing environmental pollution and customer blockages That’s up from a prior management estimate of £40 million. 

Earlier in the year, Severn completed a  £245 million equity fundraising to bankroll its planned Green Recovery programme. The environmental programme is aimed at fostering recovery from the pandemic, creating new jobs and boosting investment into green initiatives. 

Projects are expected to include increasing water supply, accelerating river improvement plans and helping customers to save water via smart meters.

ii view:

Severn Trent supplies over eight million people with around two billion litres of clean drinking water every day. Like utility companies in general, Severn is considered to be defensive. No matter what the state of the economy, people will always need water. Dependable cashflows from bill paying customers have become highly prized in underwriting dividend payments. 

For investors, the pandemic has shown that other factors outside of the weather and rainfall can influence performance. Periodic negotiations with the industry regulator also need to be considered. As does the environment and the water industry’s accountability and impact.

But a fresh regulatory policy only began in 2020 and runs until 2025.  Revenues and the dividend are linked to inflation, a feature worth remembering in an inflationary period. In all, and with the shares offering an estimated future dividend yield of over 3.5%, against a backdrop of still very low interest rates, Severn’s core dividend attraction remains.  

Positives: 

• Attractive dividend payment (not guaranteed)
• Defensive qualities 

Negatives:

• Defra, Ofwat & Environment Agency investigation into sewage treatment works
• Uncontrollable factors such as the weather can hinder performance

The average rating of stock market analysts:

Hold