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80.4 Reasons That May Make Severn Trent plc A Buy

Today I am outlining why I believe Severn Trent (LSE: SVT) is an excellent stock selection for those seeking dependable dividends well into the future.

Dividends expected to flow higher

Severn Trent has recovered strongly after it was forced to cut 2011’s full-year dividend, with chunky year-on-year rises in recent years making it a darling of income investors once again. Indeed, City analysts expect Severn Trent’s full-year dividend this year to rise 6% to 80.4p, and I expect payouts to continue rolling higher well into the future.

Like all utility selections, Severn Trent’s defensive nature makes it easy to predict earnings regardless of wider macroeconomic pressures — everyone needs water, after all. This in turn makes them dependable dividend providers. And following this year’s projected dividend increase to 80.4p, the City’s number crunchers anticipate the full-year dividend to rise to 85.1p in the year ending March 2015, a further 5.9% year-on-year increase.

These predicted payments carry chunky yields of 4.3% and 4.6% respectively, comfortably beating the forward average of 3.1% for the FTSE 100 but trading roughly in line with a corresponding readout of 4.4% for the broader gas, water and multiutilities sector.

Still, in my opinion the company is a much more attractive investment proposition than its peers on a cost basis. Severn Trent currently sports a prospective P/E rating of 21.5 versus a corresponding readout of 28.3 for the rest of the sector.

Some argue that the water operator is still an expensive pick when tallied up against a number of other utilities stalwarts, such as Centrica and National Grid which currently carry forward P/E ratings of 12.7 and 14.8 respectively. However, these companies face the prospect of intensifying attacks on their profitability from politicians, consumers and the media alike in coming months.

As I have previously explained, I believe that current attacks on electricity providers will eventually peter out as the residents of Westminster, in reality, realise the potential costs of getting it wrong in their fight against the industry if the lights were to out.

The threat of potential action, however unlikely, is still very real, a scenario which makes Severn Trent a more appealing pick as a dependable dividend payer looking ahead in my opinion. With prices set by water regulator Ofwat, the company is protected from the type of profits attacks currently affecting the electricity sector, making earnings — and thus dividends — growth much easier to forecast over the longer-term.

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> Royston does not own shares in any of the companies mentioned in this article.