While utility stocks may appear to be a relatively safe place to invest your money, with demand for their services being fairly stable, the remainder of 2015 could see them split into something of a two-tier market. That’s because, on the one hand, there are utility stocks such as Centrica (LSE: CNA) and SSE (LSE: SSE) which could become relatively volatile if the Labour party wins the General Election.
Meanwhile, there is another group of utility companies, which includes Severn Trent (LSE: SVT), where political risk is low and a change in government should not affect their valuations.
Despite this, all three companies look to be worth buying right now and are set to deliver stunning long-term returns. Here’s why.
Domestic Energy
The reason for additional political risk for domestic energy suppliers such as Centrica and SSE is the fact that the Labour party is seeking to freeze prices and establish a new regulator. Of course, the current regulator has the scope to fine companies in the sector, but Labour wants to create a tougher regulator with additional powers. This, it is feared, could lead to lower profitability for the likes of Centrica and SSE and, as such, their valuations may fall if Ed Miliband moves in to 10 Downing Street.
Water Services
While the cost of water is much less than gas and electricity for hardworking families in the UK, it remains a significant outlay. Despite this, there is an apparent lack of interest in water prices from both consumers and the government and, while the water services market is being opened up and should mean that consumers will have more choice, this is unlikely to lead to major political risk in the medium term. As such, the likes of Severn Trent appear to have a relatively stable future and could find investor demand for their shares rise if Labour win the election, as investors seek out more stable and robust companies.
Looking Ahead
In the long run, though, all three companies appear to be excellent buys at the present time and, while their short term performance may differ, they look set to post excellent returns. That’s at least partly because they offer stunning yields at the present time, with Centrica having a yield of 4.8% and SSE and Severn Trent currently yielding 5.8% and 3.7% respectively. And, with interest rates set to stay low over the medium term, concerns regarding their significant debt repayments may subside and allow market sentiment to improve, while their income potential should also become even more appealing as a loose monetary policy looks set to stay.
So, while the next few months may be somewhat challenging for a number of utility stocks, the likes of Centrica, SSE and Severn Trent remain strong buys for long-term investors.
