Severn Trent Plc Could Be Worth 2130p

Gains of 22% or more could be on offer for investors in Severn Trent Plc (LON: SVT). Here’s why…

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With interest rates having been at historic lows for a good few years now, relatively high-yielding defensive shares such as Severn Trent (LSE: SVT) have become popular among many investors.

Indeed, the utility industry sector , which contains a number of such stocks, has been bid up due to the increased demand from investors, with some of its members commanding fairly demanding valuations.

However, Severn Trent still seems to offer decent value and, more importantly, significant upside potential.

For instance, it trades on a free cash flow yield of 5.5%, which seems to be generous when the Bank of England base rate is just 0.5%. Furthermore, last year’s figure was not a one-off: Severn Trent has delivered positive free cash flow in each of the last 5 years.

Indeed, a free cash flow yield of 4.5% would still be fairly generous and, were shares to trade on such a yield, they would be priced at 2130p, which is around 22% higher than the current price level.

Although gains of over 20% would be impressive, Severn Trent continues to offer a generous yield of 4.6%, so the total return from investing in the company could be nearer to 30%.

In addition, Severn Trent continues to be a potential bid target; especially for foreign investors who value the stability and predictability of its revenue and earnings streams.

A bid was launched earlier in the year and Severn Trent’s share price spiked to reach north of 2100p before falling back after the board rebuffed the approach.

Clearly, the board may take some convincing that a sale is in the best interests of shareholders, but the bid does, nevertheless, highlight two important points.

Firstly, Severn Trent is undoubtedly attractive at current price levels to potential suitors. The fact that the approach was rebuffed does not necessarily mean that other potential buyers will be put off and, as such, another bid could be possible while shares trade at less than 2000p.

Secondly, persistent bid rumours and the expectation of a bid can help to drive shares upwards, even if a bid never materialises. For instance, continued bid talk may lead to speculation on the shares that could allow investors to take advantage of an inflated share price to lock in profits.

Indeed, Severn Trent seems to have the potential to deliver a gain of 22% or more, while also offering a yield of 4.6% and the potential for further bid approaches.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter does not own shares in Severn Trent.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »