Utility stocks have traditionally been seen as solid, low-risk investments paying attractive levels of income to compensate for the lack of share price action. This reputation may need to be revised, given the lousy performance of British Gas owner Centrica (LSE: CNA).
Stormy weather
The £7.77bn FTSE 100 stalwart was thought to offer a safe port in times of trouble, only to find itself in the eye of a perfect storm. The stock is down 55% measured over five years and investors who were sucked in by last summer’s brief rally will have been disappointed by yet another decline.
Centrica has been hit by everything from talk of energy price freezes to the threat of renationalisation if Jeremy Corbyn’s Labour Party takes power. It also faces the more immediate damage caused by the loss 90,000 customers every single month, on average, as competition hots up in the sector that now boasts 70 energy suppliers (even if a shocking number have gone bust lately).
Suspicious income
Centrica is still easily the largest with more than 12m customer accounts. But it also took a £70m hit from the new Ofgem energy price cap introduced on 1 January (which is set to be revised upwards in April). Other problems include two nuclear power stations being taken offline and outages at its oil and gas fields.
The FTSE 100 is now full of companies with low valuations and 7% plus yields. Centrica currently trades at 11.2 times earnings and yields a whopping 8.8%. But be warned, City broker Jefferies recently said the payout is “hanging by a thread” due to operational problems and volatile commodity prices. The dividend has been frozen at 12p per share for the past three years and looks vulnerable. Especially if Centrica keeps shedding customers at such a rate.
Watery winner
UK water and wastewater company Severn Trent (LSE: SVT) looks to have stronger defensive capacities, with the share price up a nice-but-dull 15% over the past five years.
This morning, it published its trading update for the period from October 1 to 6 February and is on course to deliver a full-year trading performance in-line with expectations and guidance. It is currently making its biggest capital spend in a decade, partly funded from £870m of efficiency savings, while its business plan was recently one of just three fast-tracked by regulator Ofwat.
Debt worry
The £4.67bn FTSE 100 company trades at 16.5 times earnings, so there’s no bargain entry price here. This is not one of those crazy high-yielders that seem to be everywhere these days. Severn Trent has a solid payout of 4.3%, with cover of 1.4. The positive side is that nobody is fretting about the dividend and management is progressive, recently hiking the interim payout by 8%. Operating margins of 31.2% look healthy.
One concern is the group’s £5.4bn of net debt, which leaves it vulnerable to rising interest rates. Especially as it’s also funding an expensive capital investment programme. Another is that a Corbyn administration would happily nationalise Severn Trent if it could. However, it still looks a more solid better than Centrica right now.
