After the election, we are in a different world. A few days ago, it was possible to imagine that a sweeping programme of nationalisation was about to transform the UK.
If things had been different
That was the plan outlined by Jeremy Corbyn’s Labour Party for its first 100 days in power. It was pretty popular among the electorate, although not popular enough, as it turned out.
If the election result had been reversed, FTSE 100 dividend-paying stalwarts such as Centrica and National Grid would be plunging today, as investors waited to see how much compensation Chancellor John McDonnell would pay when he took them into public ownership.
In the real world, the one where Boris Johnson is still Prime Minister but now with a landslide, the Centrica share price is up 7.46%, while National Grid is up 6.94%. For them, it is now business as usual.
These are not the only utilities flying today. The water companies were also in line for nationalisation, and now they’re not. The result is that the Severn Trent (LSE: SVT) share price is up a whopping 8.24% at time of writing, and United Utilities Group (LSE: UU) is up 7.78%. That is way ahead of the 1.67% rise on the FTSE 100, at time of writing. Clearly, some investors took the prospect of nationalisation seriously. Not anymore.
I would still think twice about rushing to buy them right now, however. That kind of spike often retreats in later trading, as investors pocket their profits. However, the long-term attraction is greater, now that one major area of uncertainty has gone for the foreseeable future.
Power of Severn
The Severn Trent share price has performed particularly well over the last year, trading 17.67% higher, but you cannot expect that kind of return from a utility year after year. What is at stake is the income. Here things look pretty good, with the stock currently yielding 4.5%.
Management is taking a progressive attitude, recently lifting its interim dividend by 7%, in line with its policy of growing it by inflation plus 4%. However, that followed an 11.2% drop in first-half pre-tax profit to £180.7m, which partly explains why dividend cover is relatively thin at 1.4.
The £5.72bn group now trades at 16.6 times earnings, after today’s leap, so looks fairly valued rather than a bargain play. Business costs are mounting, while City analysts are predicting a 7% drop in earnings this year and a drop of 18% the next. The nationalisation threat may have passed, but Severn Trent still has other issues to deal with.
United we fall
Today’s jump in the United Utilities share price is welcome given that it has gone nowhere for the past five years. I have previously warned that the UK’s largest listed water company has a massive debt pile of £8.8bn, although management says this is within its target range.
The £6.2bn group now trades at 15.1 times earnings, pretty much fair value, while offering a generous forecast yield of 5%, although again, cover is thin at 1.3. However, with earnings forecast to fall 26% next year, I’m getting cold feet.
Loyal investors are enjoying themselves today, but the future could be patchy. I would put these two on my watchlist, now the nationalisation threat has receded, but I wouldn’t buy them yet.