Underlying operating profit at water utility Severn Trent (LSE: SVT) fell by 3.2% to £523m during the year to 31 March.
Severn Trent’s revenue and profits are under pressure due to a cut in the regulated prices the firm is allowed to charge for supplying water. So today’s results were reasonably positive and in line with expectations.
The company will pay a final dividend for 2015/16 of 48.4p, giving a total payout of 80.66p. The firm’s policy of increasing the dividend in line with RPI inflation will be maintained and next year’s payout has been set at 81.5p. This gives a forecast yield of 3.65%.
My only problem with Severn Trent is that it seems too expensive. Earnings per share are expected to fall slightly next year, and dividend growth will be 1.04%. The yield of 3.6% is below the FTSE 100 average of 4% and the shares trade on a demanding 22 times forecast earnings. I think there are better buys elsewhere in the utility sector.
UK DIY sales power growth
Kingfisher (LSE: KGF), which owns B&Q and Screwfix, said that like-for-like sales rose by 3.6% during the first quarter of the year. This is a good result, but not all of the group’s businesses are performing equally well.
Q1 growth was driven by a strong performance in the UK, where like-for-like sales rose 6.2%. Kingfisher’s sales in France – the group’s other main market – only rose 0.2% on a like-for-like basis.
Despite this weakness, I believe Kingfisher remains a quality stock with an attractive valuation. The firm had net cash of £483m at the end of last year and trades on 16 times forecast earnings, falling to 15 times for next year.
Kingfisher’s dividend yield of 2.9% is slightly below average, but it’s backed by free cash flow and should continue to rise.
Upmarket acquisition looks smart
Cycle and car maintenance retail chain Halfords Group (LSE: HFD) has acquired premium bike and accessory retailer Tredz Limited and its sister firm Wheelies Direct Limited.
Tredz is an online retailer of premium bikes and accessories, while Wheelies Direct is the UK’s largest provider of bicycle replacement for insurance companies. Sales at the two firms grew by 33% to £32m last year, but in my view their value to Halfords could be greater than this.
Halfords’ cycle offering has always been focused around its own brands. While these have improved, they lack the genuine upmarket appeal of premium brands such as Specialized and Cannondale.
Tredz will continue to trade independently under its existing management. This should provide Halfords with a new avenue of growth and a potential route into the top-end bike market. The firm has paid £18.4m cash for Tredz and Wheelies, with a further payment due dependent on performance.
I think this deal adds to Halfords’ attraction as a retail investment. With the shares trading on 13 times forecast earnings and offering a 3.9% forecast yield, now could be a good time to buy more.
