3 Reasons That Could Make Severn Trent plc A Savvy Stock Purchase

Royston Wild looks at why Severn Trent plc (LON: SVT) may be a canny investment after all.

| 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.

Today I am looking at why I believe Severn Trent (LSE: SVT) could be a profitable contrarian play for courageous investors.

Ofwat’s stance beginning to soften?

A number of brokers believe that Ofwat’s most recent price guidances not only provides the water sector’s major players with water-256349_640improved visibility, but that the final decision over returns will also be much more flexible than initially suggested.

Under the AMP6 regulatory regime, due to run from 2015-2020, the regulator previously said that the weighted average cost of capital (WACC) must be no higher than 3.85%. This is higher than the current industry average of 4.3%.

However, RBC Capital recently commented that “Ofwat has left the door open for companies to achieve additional meaningful financial incentives for outperformance, which means achievable returns could be as high as 5.55%.”

Takeover talk back on the agenda

Possible signs of loosening rules over cashflow and returns has led to speculation that the water sector could be the subject of fresh takeover approaches once again. A number of sovereign wealth funds have previously shown great interest in acquiring British utilities, so an improving earnings outlook could very possibly lead to renewed overtures.

Indeed, Deutsche Bank commented last month that “within a year we believe the sector will have regulatory and dividend visibility and a resumption of bid speculation is possible.” And the broker added that “these factors could drive a re-rating of listed water stocks to levels comparable with UK and US regulated peers.”

Dividend forecasts set for rosy revisions?

And with signs that the regulatory backdrop may be on the mend, the dividend outlook at Severn Trent and its peers in the water sector — historically safe havens for those seeking plump payouts — could be set for a solid upgrade.

Indeed, even though the legislative backdrop remains precarious, City analysts still expect Severn Trent to shell out above-average payouts during the medium term. A full-year dividend of 85p per share is expected for the year ending March 2015, creating a yield of 4.8% which comfortably surpasses the current FTSE 100 forward average of 3.3%.

And even though a double-digit earnings drop in 2016 is forecast to push the payment to 81p, this projected dividend still creates a big-cap beating yield of 4.6%.

Make no mistake: the water sector’s big players remain hugely dicey investments given that the enduring furore over escalating household bills continues to dominate the regulator’s actions. But for risk-tolerant investors the likes of Severn Trent could ultimately prove a shrewd stock purchase.

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.

Royston does not own shares in Severn Trent.

More on Investing Articles

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 »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »