Severn Trent (LSE: SVT) reported full-year results today broadly in line with expectations — but is this the one utility that you should add to your portfolio right now?
To be honest, I still prefer National Grid (LSE: NG), although Centrica (LSE: CNA) has caught my attention in the last few weeks, while United Utilities (LSE: UU) is another strong contender.
Severn Trent — Hold
The shares are down 1.3% in early trade, but I think investors should give more credit to Severn Trent.
One caveat is that its forward net earnings and core cash flow multiples, at 23x and 11.5x respectively, do not strike me as being incredibly attractive. At 2,153p, where Severn Trent currently trades, you may bet on limited capital appreciation and a dividend — its forward yield stands at 3.7% — that should rise in line with inflation until 2020.
It’s not much, but since chief executive Liv Garfield was appointed to the board on 11 April 2014, Severn Trent has risen 23% in value, which is no coincidence. The water company has done a better job at managing expectations than in the past, and will likely continue to do so in future, in my view.
By comparison, its competitor United Utilities proved to be a star performer, and is up 32% over the period, while National Grid has risen 12% and Centrica is down 16%.
I would hold the stock right now.
National Grid — Buy
The shares have been under pressure for some time, but I think at 900p they offer a very attractive entry point. Its forward net earnings and core cash flow multiples stand at 15.8x and 10.4x, respectively, while its forward yield is higher than that of Severn Trent at 4.8%. The stock is flat for the year, but National Grid boasts more defensive features than those of other utilities. In my view, National Grid could well rise to 1,110p over time based on the value of its assets and its fundamentals — annual results released on Wednesday reaffirmed that view.
Centrica — Sell
Centrica has risen a lot in the wake of the General Election, with its stock up 10% since 7 May. Goldman Sachs raised its price target to 305p earlier this week, which implies upside of 8.5% from its current level of 281p. Centrica trades on net earnings and core cash flow multiples of 16x and 7x, respectively, but I am not convinced that it offers a bargain right now. I am still concerned about its cash flow profile, while working capital management isn’t reassuring, either, in my view. Moreover, its forward dividend at 4.2% signals risk, in spite of a recent cut to the payout… I’m not convinced, so personally I’d exit the stock right now.
United Utilities — Hold
United Utilities has benefited from operational improvement and takeover talk in the last 12 months. The stock is up 10% year to date, and currently trades on net earnings and core cash flow multiples of 22x and 13x. Its forward yield stands at 4%, and the company plans to grow dividends at least in line with RPI inflation in the next five years. That’s a reasonable target.
United Utilities trades at 1,002p. JP Morgan cut its price target to 1,020p today, but consensus estimates are for an average price target that is 3.5% below its current valuation. If I were invested, I would hold onto it for a few quarters — its full-year results this week did not disappoint investors.
