If you’re an income investor looking to park your cash somewhere that’s likely to be immune to today’s political and economic uncertainties, then I believe UK-listed water companies would be a great place to start.
Unless you’ve shunned even the most basic of privileges that modern life has to offer, then you’ll no doubt be accustomed to the reliable flow of running water from your kitchen and bathroom taps, and not be too worried about where it goes once you’ve finished with it. Chances are you’re just one of tens of millions of customers of one of the UK’s regional water companies.
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These giant utility firms are effectively run as regional monopolies, making them very attractive investments indeed. In fact, of the 10 original water authorities in England & Wales that were privatised back in 1989, only three remain listed on the London Stock Exchange. The rest have been completely taken over and are no longer publicly listed, with some even under foreign control.
Predictable inflation-proof income
So what is it about our boring water businesses that proves to be so irresistible to overseas investment funds and foreign consortia? The answer is a steady stream of predictable inflation-linked income.
Industry regulator Ofwat determines how much water companies can charge customers in exchange for services and further investment, with five-year regulatory settlements providing investors with a heads-up on future earnings. In an age of uncertainty that’s very reassuring indeed.
United Utilities remains the largest of the three remaining London-listed water companies, valued at £4.5bn, and you can read my most recent appraisal of the business here. Next in terms of size is Severn Trent (LSE: SVT), the only other water and sewerage company listed in the FTSE 100 index.
The Coventry-based utility giant provides water and wastewater services to residents and businesses across the heart of the UK, as far north as Scunthorpe, and as far south as Gloucester, and even includes parts of Wales.
Last year, the group upgraded its dividend policy to deliver growth of at least the Retail Price Index (RPI) plus 4%, taking the forecast FY2018 payout to 86.64p per share. After the recent dip in the share price, that equates to a mouth-watering yield of 4.9%.
Energy from waste
For those looking for an even higher return on their investment then FTSE 250-listed Pennon Group (LSE: PNN) could be the answer to your prayers. The Exeter-based group is the owner South West Water, which provides water and wastewater services to Devon, Cornwall and parts of Dorset and Somerset.
Like its larger peers Pennon operates as a virtual monopoly within its own defined geographical area, but it also has the added attraction of being a leader in delivering energy from waste through its Viridor subsidiary.
Management hhasve pledged to grow the group dividend by 4% above inflation each year at least until 2020. With analysts having pencilled-in a full-year payout of 38.56p per share for FY2018 this equates to a nice fat low-risk return of 6%.