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Treat Yourself To A Solid Income Stream From Severn Trent plc

Water utility Severn Trent (LSE: SVT) is the type of share that can easily get overlooked in the Christmas rush. It isn’t the most glittering stock under the tree, but unlike most of the gadgets and gizmos you’ll buy in the next week, it should continue to serve you well for years and years.

Severn Trent currently yields around 4.5%, nine times Bank of England base rate. The regular supply of dividends will keep you warm for many Christmases to come. It has also delivered solid growth of 7% this year, nudging total investor return into double figures, with relatively little risk. That’s what utilities are supposed to do.

Profits drain away

It has even delivered the odd moment of excitement, with a share price spike on talk of a consortium takeover in May. That went nowhere, but the dividends kept flowing. Underlying pre-tax profit fell 5.8% to £141 million in the six months to October, after Severn Trent assumed responsibility for maintaining a number of private drains and sewers, but the dividend only flowed faster, up a progressive 6% to 32.16p.

Profits will continue to be squeezed, however, as Severn Trent pledges to keep prices affordable for cash-strapped consumers. The business plan It has just submitted to Ofwat for the regulatory period April 2015 to March 2020 pledges to freeze prices in year one, then hike them by less than inflation for the remaining four years. Retail margins are set to be a watery 0.7% for households and 3% for businesses. Ofcom has praised Severn Trent for minimising price rises and passing on the benefits of record low interest rates to customers. Investors may be less lavish in their praise.

Let it flow

There are certainly shinier baubles out there. Water utilities are capital intensive businesses, they have to spend big to meet stringent regulatory and efficiency targets. Severn Trent’s earnings per share are projected to fall 14% in the year to March 2014, before rising a modest 5% to March 2014. The dividend is forecast to hit a juicy 5.1% by then. You pay a price for this yield, however, with Severn Trent currently trading at 17.5 times earnings. That compares to 14.66 time earnings for the gas, water and multiutilities sector. If you think that is a bit pricey for a Christmas treat, you could always wait to see if it is going cheap in the January sales.

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> Harvey doesn't own shares in any company mentioned in this article