SSE PLC (LON: SSE), National Grid plc (LON: NG), Centrica PLC (LON: CNA), United Utilities Group PLC (LON: UU) and Severn Trent Plc (LON: SVT) compared.
With dividend yields between 4.4% and 5.7%, the five utilities in the FTSE 100 are in the top echelons of high-yield stocks. And with the reliability and resilience of the utility sector, they merit serious consideration in any portfolio. But which offer the best prospects?
Dividends
In terms purely of yield, SSE (LSE: SSE) -- the former Scottish and Southern Electricity -- and National Grid (LSE: NG) are ahead of the field, yielding 5.7% at current prices.
| | Share price | Trailing yield (%) | Dividend cover |
|---|
| SSE | 1,407p | 5.7% | 0.9 |
| National Grid | 689p | 5.7% | 1.4 |
| Centrica | 342p | 4.5% | 1.3 |
| United Utilities | 732p | 4.4% | 1.0 |
| Severn Trent | 1598p | 4.4% | 0.8 |
The other three, British Gas-owner Centrica (LSE: CNA) and water companies United Utilities (LSE: UU) and Severn Trent (LSE: SVT), are bunched together with yields of about 4.5%.
But it's not just the level of dividends that matters. It's also important to look at the track record of dividend increases, and the level of dividend cover.
You can see from the table that, with a dividend cover below 1.0 last year, neither SSE nor Severn Trent earned enough to cover the dividend payment. That can be a danger sign, and obviously isn't sustainable in the long term. But with the reliability of utilities' earnings, an occasional breach isn't catastrophic.
Nevertheless, the higher the dividend cover, the greater the scope for future dividend increases.
Balance
It's also important to look at the balance of companies' regulated and unregulated businesses. Regulated business is more stable, but profitability and growth is constrained by the industry regulator.
About 40% of SSE's business is its regulated downstream gas and electricity operations. Upstream generation makes it Britain's second-largest power supplier and, in addition to traditional thermal and hydro technologies, it's making big strides into wind power.
SSE has a record of increasing dividends going back over two decades. An increased eight-year regulatory cycle, starting in March, should underpin reliable future performance.
Monopoly
National Grid will also benefit from that longer regulatory period, though it is suffering from some uncertainty about its capital spending under the new regime. Apart from being the monopoly supplier of electricity and gas transmission in the UK, it owns a regulated utility in north-eastern US, which contributes about 40% of profits.
Dividends were being increased by an impressive 8% p.a., but this has tailed off to 4% in anticipation of the next regulatory review.
Centrica's downstream business is regulated, but it has diversified into upstream gas production. Its gas-fired generating business may well benefit from the government's new 'dash for gas'. A recent decision to pull out of new nuclear projects has released the cash for a £500m share buy-back, but raised questions about its future investment programme. A strategy update is due at the end of this month.
Water
United Utilities provides water in the Northwest of England. Severn Trent is the supplier to the Midlands and Mid-Wales, and it has a non-regulated international water services business.
The water industry's next five-year regulatory cycle commences in 2015. The harshness of the last settlement and possible changes to the industry structure in the next review put some investors off this sector. But a string of acquisitions by foreign buyers demonstrates what attractive long-term infrastructure investments they are.
With those transactions taking place at substantial premiums to the companies' regulated assets, it has put a floor under share prices in the sector, leading to some scary-looking price-to-earnings multiples.
Apart from a glitch in 2011, Severn Trent has an impressive dividend track record. United's is a little more patchy.
Reliable
Overall, utilities are some of the best and most reliable dividend payers in the FTSE 100. They're attractive for income investors or those who re-invest dividends for growth and, like Einstein, wonder at the mathematical power of compound interest.
In fact, one of these companies has just been declared the "Motley Fool's Top Income Stock For 2013". Not only does it offer a top-notch income, with a dividend consistently outstripping inflation, but its shares may be worth over 20% more than they are currently trading at.
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> Tony owns shares in SSE, National Grid and Centrica but no other shares mentioned in this article.
